CH 17: Investments -- True/False

Available for Sale securities are securities that are bought and held primarily for sale in the near term to generate income on short-term price differences.

FALSE -- Available for Sale securities are securities not classified as held to maturity or trading securities. Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

The fair value method requires that companies classify equity securities at acquisition as held to maturity securities.

FALSE -- Because equity securities have no maturity date, they cannot be classified as held to maturity.

Held to maturity securities are accounted for at fair value.

FALSE -- Held to maturity securities are accounted for at amortized cost, NOT FAIR VALUE. Amortized cost is the acquisition cost adjusted for the amortization of discount or premium, if appropriate.

If one corporation acquires an interest of less than 20% in another corporation, that investor is generally deemed to have little influence over the investee and will account for the investment under the equity method.

FALSE -- If one corporation acquires an interest of less than 20% in another corporation, that investor is generally deemed to have little influence over the investee and will account for the investment under the fair value method.

Both debt securities and equity securities can be classified as held to maturity.

FALSE -- Only debt securities can be classified as held to maturity because, by definition, equity securities have no maturity date.

Unrealized gains and losses related to changes in the fair value of available for sale debt securities are recorded in an unrealized holding gain or loss account which is reported as part of net income.

FALSE -- Unrealized gains and losses related to changes in the fair value of available for sale debt securities are recorded in an unrealized holding gain or loss account which is reported as other comprehensive income and as a separate component of stockholders' equity until realized.

Amortization of discount or premium on trading debt securities is debited or credited to the Fair Value Adjustment account.

FALSE-- Amortization is debited or credited to the Debt Investments Account.

Amortization of discount or premium on available for sale debt securities is debited or credited to the Debt Investments account.

TRUE

Held to Maturity securities are securities that the enterprise has the positive intent and ability to hold to maturity.

TRUE

If the practicability exception is elected, companies record investments at cost, less impairment.

TRUE

In instances of "significant influence" (generally an investment of 20% or more), the investor is required to account for the investment using the equity method.

TRUE

The equity method gives recognition to the fact that investee earnings increase investee net asssets that underlie the investment and investee losses and dividends decrease the net assets.

TRUE

Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income.

TRUE

Under the equity method, the investee's net loss decreases the investment account.

TRUE