Q26. One of the most heated issues in accounting history is related to the treatment of Fair Value Accounting. In recent years, implementing Fair Value Accounting on some financial assets and liabilities has recently led banks (e.g., Bank of America, Citi, J.P Morgan Chase & Co) to recognize gains related to their liabilities. The mechanism that leads to such gains can be characterized as follows:*

a. Banks' own credit risk decreases, which leads to a reduction in the fair value of banks' liabilities

b. Banks' own credit risk decreases, which leads to an increase in the fair value of banks' liabilities

c. Banks' own credit risk increases, which leads to a reduction in the fair value of banks' liabilities

d. Banks' own credit risk increases, which leads to a reduction in the fair value of banks' assets

e. None of the above is correct

Q27. With regards to depreciation, which of the following is true?*

a. Depreciation expense is a source of cash

b. Land is depreciated over a long time, usually over fifty years

c. Firms recognize depreciation expense to reflect the change in fair market value of assets

d. Firms recognize depreciation expense to allocate the cost of assets over their useful life

e. None of the above is correct

Q28. On December 31, Year 1, Adam Corporation has 5,000 shares of par value common stock, additional paid-in capital of $25,000, total shareholders' equity of $80,000, and retained earnings of $45,000. There are no other items in shareholders' equity that are not provided in the question (e.g., treasury stocks). What is the par value per share?*

a. $1.00

b. $1.50

c. $2.00

d. Par value is always the book value of equity divided by the number of shares, thus it is $16 (i.e., $80,000/5,000)

e. None of the above is correct

Q29. The financial statements of the Bank of London are edited based on principles that use Fair Value accounting to measure all its assets and liabilities, rather than on principles that use the historical cost principle. During the year, there was an increase of X dollars in the fair value of the bank's liability as well as an increase of Y dollars in the fair value of the bank's asset. Other than these increases, over the period there was no other effect on the bank's operations or on the values of the bank's assets and liabilities.*

a. If X > Y, the bank's Net Income will be affected positively (i.e., higher Net Income) during the period

b. It is not possible that the fair values of both the asset and the liability will increase during the year. Because of conservatism, the effect must be either on the assets side or on the liabilities side

c. It is possible that the fair values of both the asset and the liability will increase during the year. Because of conservatism, the only effect that matters is on the liabilities side, resulting in an overall negative effect on Net Income, regardless of the relationship between X and Y

d. There is not enough information to know whether any of the above three choices is correct

e. None of the above is correct