Your firm is contemplating the purchase of a new investment security. Which of the following would most likely be classified as a held-to-maturity investment under U.S. GAAP?

• A. Common stock purchased for short-term trading gains
• B. A corporate bond that the firm intends and is able to hold until maturity
• C. A government bond that the firm may sell if interest rates change
• D. Preferred stock acquired for long-term strategic purposes

Answer: (B)

Verified step by step guidance

1. Understand the classification of investments under U.S. GAAP. Investments are categorized as held-to-maturity, available-for-sale, or trading securities based on the firm's intent and ability to hold the investment.
2. Recognize that held-to-maturity investments are debt securities (e.g., corporate bonds, government bonds) that the firm has both the intent and ability to hold until their maturity date. Equity securities, such as common or preferred stock, cannot be classified as held-to-maturity because they do not have a maturity date.
3. Evaluate the options provided in the problem. Common stock purchased for short-term trading gains would be classified as trading securities, not held-to-maturity. Preferred stock acquired for long-term strategic purposes would also not qualify as held-to-maturity because it is an equity security.
4. Analyze the government bond option. While it is a debt security, the firm's intent to sell it if interest rates change indicates that it does not meet the criteria for held-to-maturity classification. This would likely be classified as available-for-sale instead.
5. Conclude that the corporate bond, which the firm intends and is able to hold until maturity, meets the criteria for held-to-maturity classification under U.S. GAAP.