Ch. 17: T/F

(T/F) Amortization of discount or premium on available-for-sale debt securities is debited or credited to the Debt Investments account.

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(T/F) Amortization of discount or premium on trading debt securities is debited or credited to the Fair Value Adjustment account.

F - Amortization is debited or credited to the Debt Investments account.

(T/F) Companies may also use the fair value option for their own debt instruments.

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(T/F) Held-to-maturity securities are securities that the enterprise has the positive intent and ability to hold to maturity.

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(T/F) Under the equity method, the investee's net loss decreases the investment account.

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(T/F) A call option increases in value when the underlying asset decreases in value.

F - A call option increases in value when the underlying asset also increases in value. A put option increases in value when the underlying asset decreases in value.

(T/F) 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.

F - 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.

(T/F) The fair value method requires that companies classify equity securities at acquisition as held-to-maturity securities.

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

(T/F) Derivatives should be reported in the balance sheet at historical cost.

F - Derivatives should be reported in the balance sheet at fair value.

(T/F) Embedded derivatives should be recorded in the same manner as the host security.

F - Embedded derivatives should be bifurcated from the host security and recorded separately as a derivative instrument.

(T/F) Gains and losses resulting from the speculation of derivatives should not be recognized immediately in income.

F - Gains and losses on derivatives resulting from the speculation of derivatives should be recognized immediately in income.

(T/F) Held-to-maturity securities are accounted for at fair value.

F - 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.

(T/F) Once the equity method is adopted by an investor, the method must continue in use until the investment to which it has been applied is sold or liquidated by some other means.

F - If an investor's level of influence or ownership falls below that necessary for continued use of the equity method, a change must be made to the fair value method. If the investor's level of influence or ownership increases to 50% or more, a change to the consolidated method must be made.

(T/F) 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.

F - 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.

(T/F) Both debt securities and equity securities can be classified as held-to- maturity.

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

(T/F) Companies can choose the fair value option at any time they are holding a financial instrument.

F - The fair value option is generally available only at the time a company first purchases the financial asset or incurs a financial liability.

(T/F) 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 a part of net income.

F - 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.

(T/F) If the decline in value of securities is judged to be other than temporary, the cost basis of the individual security is written down to a new cost basis.

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(T/F) If the practicability exception is elected, companies record investments at cost, less impairment.

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(T/F) 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.

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(T/F) The equity method gives recognition to the fact that investee earnings increase investee net assets that underlie the investment and investee losses and dividends decrease the net assets.

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

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(T/F) Whenever an investment in equity securities does not qualify for equity method treatment or for the use of consolidated financial statements, the investor is required to use the fair value method in accounting for the investment.

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(T/F) With a cash flow hedge, gains or losses are to be recorded in equity as a part of other comprehensive income.

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