Question 1: On November 1, 2004, Morton Co. purchased Gomez, Inc., 10-year, 9%, bonds with a face value of $150,000, for $135,000. An additional $4,500 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2011. Morton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Morton's 2004 income statement as a result of Morton's available-for-sale investment in Gomez was
a. $2,625
b. $2,500
c. $2,250
d. $2,000
Question 2: The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
Question 3: On December 31, 2004, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work in process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31, 2004 balance sheet?
Accrued Liabilities Retained Earnings
a. No effect No effect
b. No effect Overstated
c. Understated No effect
d. Understated Overstated