Question

If GAAP required investments to be accounted for at original cost (book value), which of the following event(s) related to Silicon Investment Bank would have been more likely?

a. Fewer depositor accounts exceeding $250,000
b. A bank run – many depositors withdrawing their deposits at the same time
c. Higher bank capital (equity on the balance sheet)
d. Even greater unrealized losses reported

Answer 1

If GAAP required investments to be accounted for at original cost, Silicon Investment Bank would be more likely to have higher bank capital and fewer depositor accounts exceeding $250,000.

Step-by-step explanation:

If GAAP required investments to be accounted for at original cost (book value), the event(s) related to Silicon Investment Bank that would have been more likely are:

• Higher bank capital (equity on the balance sheet): When investments are accounted for at original cost, it means that any increase in the value of the investments will not be recognized on the balance sheet. This would result in higher bank capital, as the investments would be recorded at their original cost.
• Fewer depositor accounts exceeding $250,000: If investments are accounted for at original cost, it would be less likely for the bank to have significant gains on those investments. As a result, the bank may have fewer depositor accounts exceeding $250,000, as these accounts are more likely to be held by investors seeking higher returns.