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Financial Accounting 10Th Ed by Robert Libby - Test Bank
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,Financial Accounting, 10e (Libby)Appendix A Reporting and Interpreting Investments in Other Corporations
1) The extent of influence and control over another company is a critical factor in determining
the proper method of accounting for an investment in the common stock of another company.
Answer: TRUE
Explanation: The percentage of ownership is a major criterion for the method chosen to account
for the investment, but such percentage does not guarantee significant influence.
Difficulty: 1 Easy
Topic: Distinguish accounting for investments
Learning Objective: A-02 Analyze and report passive investments in equity securities using the
fair value method.; A-03 Analyze and report investments involving significant influence using
the equity method.; A-04 Analyze and report investments in controlling interests.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) All investments other than held-to-maturity bond investments are reported on the balance
sheet at their fair value as of the balance sheet date.
Answer: FALSE
Explanation: Investments classified as available-for-sale and trading securities are reported on
the balance sheet at fair value. Investments for which there is significant influence are reported
using the equity method. Investments for which there is more than 50% ownership are reported
using the acquisition method and consolidation accounting.
Difficulty: 2 Medium
Topic: Distinguish accounting for investments
Learning Objective: A-02 Analyze and report passive investments in equity securities using the
fair value method.; A-03 Analyze and report investments involving significant influence using
the equity method.; A-04 Analyze and report investments in controlling interests.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
1
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.
,3) Investments in bonds intended to be sold before they reach maturity should be reported under
the fair value method.
Answer: TRUE
Explanation: Investments in bonds intended to be sold are reported on the balance sheet at fair
value. If the bonds are not intended to be sold then they are reported at amortized cost.
Difficulty: 2 Medium
Topic: Held to maturity securities - Amortized cost; Fair value method accounting
Learning Objective: A-01 Analyze and report investments in debt securities using the amortized
cost and fair value methods.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Management must have the intent and ability to hold a bond investment until maturity if it is
to be classified as a held-to-maturity security.
Answer: TRUE
Explanation: Management must demonstrate the intent and ability in order to use the held-to-
maturity classification.
Difficulty: 1 Easy
Topic: Held to maturity securities - Amortized cost
Learning Objective: A-01 Analyze and report investments in debt securities using the amortized
cost and fair value methods.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Held-to-maturity bond investments must be reported on the balance sheet at fair value.
Answer: FALSE
Explanation: Held-to-maturity bond investments are reported on the balance sheet at amortized
cost.
Difficulty: 2 Medium
Topic: Held to maturity securities - Amortized cost
Learning Objective: A-01 Analyze and report investments in debt securities using the amortized
cost and fair value methods.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.
, 6) Passive debt investments other than held-to-maturity investments are reported on the balance
sheet at fair value.
Answer: TRUE
Explanation: Passive debt investments other than held-to-maturity, which are classified as
available-for-sale or trading securities, are reported on the balance sheet at fair value.
Difficulty: 1 Easy
Topic: Fair value method accounting
Learning Objective: A-01 Analyze and report investments in debt securities using the amortized
cost and fair value methods.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) A realized gain or loss is reported on the income statement when an equity investment account
is adjusted to reflect changes in fair value.
Answer: FALSE
Explanation: When the fair value of the equity investment account changes between reporting
periods, there are unrealized holding gains or losses. For all equity securities, the unrealized
gains or losses for the period are reported on the income statement.
Difficulty: 2 Medium
Topic: Fair value method accounting
Learning Objective: A-02 Analyze and report passive investments in equity securities using the
fair value method.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) An unrealized holding gain is reported on the income statement when the fair value of an
available-for-sale debt security exceeds its fair value reported in the prior period.
Answer: FALSE
Explanation: The unrealized holding gains and losses from changes in fair value of available-
for-sale debt securities are reported in other comprehensive income and accumulated in the
stockholders' equity section on the balance sheet.
Difficulty: 2 Medium
Learning Objective: A-01 Analyze and report investments in debt securities using the amortized
cost and fair value methods.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3
Copyright © 2020 McGraw-Hill Education. All rights reserved.
No reproduction or distribution without the prior written onsent of McGraw-Hill Education.
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