MCQs on Investment Accounting as per US GAAP covering trading, HTM, AFS, equity investments, associates, bonds, income recognition, unrealized gains/losses, etc.
📘 MCQs on Investment Accounting (US GAAP)
🔹 Section 1: Classification of Investments
1.
Under US GAAP, trading securities are primarily held for:
A. Long-term appreciation
B. Collection of contractual cash flows
C. Short-term profit from price changes
D. Strategic control
✅ Answer: C
👉 Trading securities are bought for short-term gains.
2.
Held-to-maturity (HTM) securities must be:
A. Equity instruments
B. Debt instruments only
C. Either equity or debt
D. Derivatives only
✅ Answer: B
3.
Which category allows both debt and equity securities?
A. HTM
B. Trading
C. Available-for-sale (AFS)
D. None
✅ Answer: C
4.
HTM investments are measured at:
A. Fair value
B. Historical cost
C. Amortized cost
D. Net realizable value
✅ Answer: C
5.
AFS securities are reported at:
A. Cost
B. Fair value
C. Amortized cost
D. Lower of cost or market
✅ Answer: B
🔹 Section 2: Unrealized Gains & Losses
6.
Unrealized gain on trading securities is recognized in:
A. OCI
B. Balance Sheet only
C. Net Income
D. Equity
✅ Answer: C
7.
Unrealized loss on AFS securities is recognized in:
A. Net Income
B. OCI
C. Retained Earnings
D. Cash Flow
✅ Answer: B
8.
Where are cumulative unrealized gains on AFS securities shown?
A. Income Statement
B. OCI (Equity section)
C. Cash Flow Statement
D. Notes only
✅ Answer: B
9.
HTM securities recognize unrealized gains:
A. In OCI
B. In Net Income
C. Not recognized
D. In Cash Flow
✅ Answer: C
10.
Which investment type causes income statement volatility?
A. HTM
B. AFS
C. Trading
D. Associates
✅ Answer: C
🔹 Section 3: Interest & Dividend Income
11.
Interest income on bonds is recognized using:
A. Straight-line method only
B. Effective interest method
C. Cash basis only
D. Market rate
✅ Answer: B
12.
Dividend income is recognized when:
A. Cash is received
B. Declared by investee
C. Earned proportionately
D. Share price increases
✅ Answer: B
13.
Interest income affects:
A. OCI
B. Net Income
C. Equity directly
D. Cash Flow only
✅ Answer: B
14.
Dividend income from equity investments is reported in:
A. OCI
B. Net Income
C. Equity
D. Balance Sheet
✅ Answer: B
15.
Premium on bond investment is:
A. Added to interest income
B. Amortized reducing income
C. Ignored
D. Expensed fully
✅ Answer: B
🔹 Section 4: Equity Investments
16.
Equity investments (<20% ownership) are generally measured at:
A. Amortized cost
B. Fair value through income
C. Cost only
D. OCI
✅ Answer: B
17.
If fair value is not readily determinable:
A. Must use OCI
B. Use cost minus impairment
C. Use market value
D. Ignore
✅ Answer: B
18.
Which method is used when significant influence exists?
A. Cost method
B. Equity method
C. Fair value method
D. Consolidation
✅ Answer: B
🔹 Section 5: Investment in Associates
19.
Significant influence is generally presumed at:
A. 5%
B. 10%
C. 20%
D. 51%
✅ Answer: C
20.
Under equity method, investor recognizes:
A. Dividends as income
B. Share of profits
C. Fair value changes
D. Nothing
✅ Answer: B
21.
Dividends received under equity method are treated as:
A. Income
B. Reduction of investment
C. OCI
D. Expense
✅ Answer: B
🔹 Section 6: Investment in Bonds
22.
Bond investment classification depends on:
A. Coupon rate
B. Intent & ability
C. Market price
D. Issuer type
✅ Answer: B
23.
Discount on bond investment is:
A. Added to interest income
B. Amortized increasing income
C. Ignored
D. Expensed
✅ Answer: B
24.
Carrying value of HTM bonds changes due to:
A. Market price
B. Amortization
C. Dividend
D. OCI
✅ Answer: B
🔹 Section 7: Conceptual & Application
25.
Which investment is best for liquidity?
A. HTM
B. Trading
C. Associates
D. Subsidiary
✅ Answer: B
26.
Which investment is best for stable income?
A. Trading
B. HTM
C. Equity speculative
D. Derivatives
✅ Answer: B
27.
AFS securities provide:
A. Only income
B. Flexibility & liquidity
C. Control
D. Fixed return only
✅ Answer: B
28.
Which investment affects OCI but not immediate income?
A. Trading
B. HTM
C. AFS
D. Associates
✅ Answer: C
29.
Investment for strategic influence is:
A. Trading
B. HTM
C. Associates
D. AFS
✅ Answer: C
30.
Which is NOT a feature of trading securities?
A. Fair value measurement
B. Income statement impact
C. Long-term holding intent
D. Frequent buying/selling
✅ Answer: C
📊 Bonus Concept Summary (Exam Revision)
| Type | Measurement | Unrealized Gain/Loss | Income Impact |
|---|---|---|---|
| Trading | Fair Value | Net Income | High volatility |
| AFS | Fair Value | OCI | Moderate |
| HTM | Amortized Cost | Not recognized | Stable |
| Equity (<20%) | Fair Value | Net Income | Moderate |
| Associates | Equity Method | Share of profit | Strategic |
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