Intermediate Accounting II Exam
Questions And Correct Answers
(Verified Answers) Plus Rationales
2026 Q&A | Instant Download Pdf
1. Which of the following best describes the primary purpose of
accounting for investments in debt securities?
A. To eliminate all investment risk
B. To determine the fair value of every security each period
C. To recognize and report the economic effects of holding the
investment
D. To guarantee future investment returns
Answer: C. To recognize and report the economic effects of holding
the investment
Rationale: Accounting for debt securities is designed to properly
recognize interest income, changes in value when required, and the
appropriate classification of the investment.
2. A debt security classified as held-to-maturity is generally reported
at:
A. Fair value
B. Amortized cost
C. Replacement cost
D. Historical market value
Answer: B. Amortized cost
,Rationale: Debt securities classified as held-to-maturity are generally
measured at amortized cost because the investor has both the positive
intent and ability to hold them until maturity.
3. Which characteristic is required for a debt security to qualify as
held-to-maturity?
A. The security must pay dividends
B. Management must intend and be able to hold it until maturity
C. The security must be publicly traded
D. The security must have a maturity of less than one year
Answer: B. Management must intend and be able to hold it until
maturity
Rationale: Held-to-maturity classification depends on both the intent
and ability to hold the debt investment to maturity.
4. Unrealized gains and losses on trading securities are generally
reported in:
A. Other comprehensive income
B. Retained earnings directly
C. Net income
D. Contributed capital
Answer: C. Net income
Rationale: Trading securities are carried at fair value, and unrealized
holding gains and losses are recognized in current earnings.
5. Unrealized gains and losses on available-for-sale debt securities
are generally reported in:
A. Other comprehensive income
B. Revenue
,C. Cost of goods sold
D. Retained earnings immediately
Answer: A. Other comprehensive income
Rationale: For available-for-sale debt securities, unrealized gains and
losses generally bypass current net income and are reported in other
comprehensive income, subject to applicable impairment
requirements.
6. Which investment classification is most closely associated with
frequent buying and selling for short-term profit?
A. Held-to-maturity
B. Trading
C. Long-term operating asset
D. Equity method investment
Answer: B. Trading
Rationale: Trading securities are acquired principally for the purpose
of selling them in the near term and therefore are measured at fair
value with changes generally recognized in earnings.
7. A bond purchased at a discount and held to maturity will generally
have its carrying amount:
A. Decrease toward zero
B. Remain unchanged
C. Increase toward face value
D. Increase above face value indefinitely
Answer: C. Increase toward face value
Rationale: The discount is amortized over the bond's life, causing the
carrying amount to increase until it reaches face value at maturity.
, 8. A bond purchased at a premium and held to maturity will generally
have its carrying amount:
A. Increase toward face value
B. Decrease toward face value
C. Remain at the purchase price
D. Become equal to fair value immediately
Answer: B. Decrease toward face value
Rationale: Amortization of a bond premium reduces the investment's
carrying amount until it reaches the bond's face amount at maturity.
9. Under the effective-interest method, interest income is calculated
by multiplying:
A. Face value by the coupon rate
B. Fair value by the market rate
C. Beginning carrying amount by the effective interest rate
D. Ending carrying amount by the coupon rate
Answer: C. Beginning carrying amount by the effective interest rate
Rationale: The effective-interest method applies the effective market
rate to the investment's beginning carrying amount to determine
interest revenue.
10. The difference between the cash interest received and interest
revenue under the effective-interest method represents:
A. A gain on disposal
B. Premium or discount amortization
C. A dividend
D. A tax adjustment
Answer: B. Premium or discount amortization
Questions And Correct Answers
(Verified Answers) Plus Rationales
2026 Q&A | Instant Download Pdf
1. Which of the following best describes the primary purpose of
accounting for investments in debt securities?
A. To eliminate all investment risk
B. To determine the fair value of every security each period
C. To recognize and report the economic effects of holding the
investment
D. To guarantee future investment returns
Answer: C. To recognize and report the economic effects of holding
the investment
Rationale: Accounting for debt securities is designed to properly
recognize interest income, changes in value when required, and the
appropriate classification of the investment.
2. A debt security classified as held-to-maturity is generally reported
at:
A. Fair value
B. Amortized cost
C. Replacement cost
D. Historical market value
Answer: B. Amortized cost
,Rationale: Debt securities classified as held-to-maturity are generally
measured at amortized cost because the investor has both the positive
intent and ability to hold them until maturity.
3. Which characteristic is required for a debt security to qualify as
held-to-maturity?
A. The security must pay dividends
B. Management must intend and be able to hold it until maturity
C. The security must be publicly traded
D. The security must have a maturity of less than one year
Answer: B. Management must intend and be able to hold it until
maturity
Rationale: Held-to-maturity classification depends on both the intent
and ability to hold the debt investment to maturity.
4. Unrealized gains and losses on trading securities are generally
reported in:
A. Other comprehensive income
B. Retained earnings directly
C. Net income
D. Contributed capital
Answer: C. Net income
Rationale: Trading securities are carried at fair value, and unrealized
holding gains and losses are recognized in current earnings.
5. Unrealized gains and losses on available-for-sale debt securities
are generally reported in:
A. Other comprehensive income
B. Revenue
,C. Cost of goods sold
D. Retained earnings immediately
Answer: A. Other comprehensive income
Rationale: For available-for-sale debt securities, unrealized gains and
losses generally bypass current net income and are reported in other
comprehensive income, subject to applicable impairment
requirements.
6. Which investment classification is most closely associated with
frequent buying and selling for short-term profit?
A. Held-to-maturity
B. Trading
C. Long-term operating asset
D. Equity method investment
Answer: B. Trading
Rationale: Trading securities are acquired principally for the purpose
of selling them in the near term and therefore are measured at fair
value with changes generally recognized in earnings.
7. A bond purchased at a discount and held to maturity will generally
have its carrying amount:
A. Decrease toward zero
B. Remain unchanged
C. Increase toward face value
D. Increase above face value indefinitely
Answer: C. Increase toward face value
Rationale: The discount is amortized over the bond's life, causing the
carrying amount to increase until it reaches face value at maturity.
, 8. A bond purchased at a premium and held to maturity will generally
have its carrying amount:
A. Increase toward face value
B. Decrease toward face value
C. Remain at the purchase price
D. Become equal to fair value immediately
Answer: B. Decrease toward face value
Rationale: Amortization of a bond premium reduces the investment's
carrying amount until it reaches the bond's face amount at maturity.
9. Under the effective-interest method, interest income is calculated
by multiplying:
A. Face value by the coupon rate
B. Fair value by the market rate
C. Beginning carrying amount by the effective interest rate
D. Ending carrying amount by the coupon rate
Answer: C. Beginning carrying amount by the effective interest rate
Rationale: The effective-interest method applies the effective market
rate to the investment's beginning carrying amount to determine
interest revenue.
10. The difference between the cash interest received and interest
revenue under the effective-interest method represents:
A. A gain on disposal
B. Premium or discount amortization
C. A dividend
D. A tax adjustment
Answer: B. Premium or discount amortization
