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1. Under the effective-interest method of bond discount or premium amortization, which of the following statements is correct?

a. As bond discount is amortized, the interest expense increases over time.

b. As bond discount is amortized, the carrying value of bonds remains the same over time.

c. As bond premium is amortized, the carrying value of bonds increases over time.

d. All of the above statements are incorrect.

2. A&O Corporation issued a 10% stock dividend of its common stock which had a par value of $10 and a fair value of $13 at the time of the stock dividend. At what amount should retained earnings be capitalized (debit to retained earnings) for the additional shares issued?

a. There should be no capitalization of retained earnings.

b. Par value

c. Fair value on the declaration date

d. Fair value on the date of distribution

3. What effect does the issuance of a stock dividend have on each of the following?

Par Value per Share Retained Earnings

a. No effect No effect

b. Increase Increase

c. Decrease Decrease

d. No effect Decrease

4. Which of the following would result in future deductible amounts?

a. Fines resulting from a violation of law.

b. Warranty expense reported in financial income before it is paid.

c. Depreciation taken on the tax return in excess of the amounts reported in financial income.

d. Interest received on a municipal obligation.

5. Under the cost method, when a company sells its Treasury Stock either above or below its cost, which of the following statements is correct with respect to accounting for the sale?

a. Sale of Treasury Stock above cost results in a debit to Paid in Capital from Treasury Stock.

b. Sale of Treasury Stock above cost results in a debit to Retained earnings.

c. Sale of Treasury Stock above cost results in a credit to Paid in Capital from Treasury Stock.

d. Sale of Treasury Stock below cost results in a credit to Paid in Capital from Treasury Stock.

6. A lessor with a sales-type lease involving unguaranteed residual value available to the lessor at the end of the lease term will report sales revenue in the period of inception of the lease at which of the following amounts?

a. Lease receivable plus the present value of the unguaranteed residual value.

b. The sales price of the asset, less the present value of the unguaranteed residual value.

c. The sales price of the asset, plus the present value of the unguaranteed residual value.

d. The sales revenue would be equal to the sales price of the asset.

7. A company changes the useful life of a building from 15 years and no salvage value to 25 years and no salvage value. The company would account for the effect of this change

a. By recasting previously issued financial statements.

b. In the period of change and future periods if the change affects both.

c. As a change in estimate effected by a change in accounting principle.

d. As a change in accounting principle.

8. A&O Corporation sold equipment for $85,000. The cost of the equipment was $100,000 and the book value was $82,000. Under the indirect method, to determine net cash flow from operations, A&O would

a. Subtract from net income a $3,000 gain from sale of equipment

b. Add back to net income a $15,000 loss from sale of equipment

c. Add back to net income a $3,000 loss from sale of equipment

d. Subtract from net income a $15,000 gain from sale of equipment.

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