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web.groovymark@gmail.com
- December 12, 2024
Question 01
What type of liability is typically recognized when an obligation to provide a future benefit arises?
A. Sales tax payable
B. Accrued wages
C. Unearned revenue
D. Accounts payable
Answer: C. Unearned revenue
Explanation: Unearned revenue arises when a company receives payment before delivering goods or services, creating a liability to fulfill the obligation in the future.
Question 02
Which depreciation method is based on usage rather than the passage of time?
A. Straight-line method
B. Activity method
C. Declining balance method
D. Sum-of-the-years’-digits method
Answer: B. Activity method
Explanation: The activity method allocates depreciation based on actual usage or production, making it suitable for assets where usage varies significantly over time.
Question 03
Which financial ratio measures the ability of a company to meet its short-term liabilities with its short-term assets?
A. Debt to equity ratio
B. Asset turnover ratio
C. Current ratio
D. Return on equity
Answer: C. Current ratio
Explanation: The current ratio is calculated by dividing current assets by current liabilities and reflects a company’s ability to cover short-term obligations.
Question 04
What does the term ‘proportional method’ refer to in bond accounting?
A. Allocating proceeds between bond and equity based on their relative fair values
B. Allocating the total proceeds to bonds only
C. Discounting future cash flows at the market rate
D. Treating all proceeds as interest revenue
Answer: A. Allocating proceeds between bond and equity based on their relative fair values
Explanation: The proportional method is used when both bond and equity securities are issued, allocating proceeds based on their relative fair market values.
Question 05
What is the book value of an asset after it has been impaired?
A. Carrying value before impairment
B. Carrying value minus impairment loss
C. Fair value plus impairment loss
D. Sum of future cash flows
Answer: B. Carrying value minus impairment loss
Explanation: After recognizing an impairment, the asset’s carrying value is reduced by the impairment loss, representing its new book value.
Question 06
Which of the following is a journal entry for recording a sale with sales tax?
A. Debit sales revenue, credit cash
B. Debit sales revenue, credit accounts receivable
C. Debit cash, credit sales tax payable
D. Debit cash, credit sales revenue and sales tax payable
Answer: D. Debit cash, credit sales revenue and sales tax payable
Explanation: When recording sales tax, the sales revenue and the sales tax payable are both credited, while cash is debited for the total amount received.
Question 07
What is the purpose of a debt to assets ratio?
A. To measure liquidity
B. To assess profitability
C. To evaluate asset utilization
D. To determine the percentage of assets financed by debt
Answer: D. To determine the percentage of assets financed by debt
Explanation: The debt to assets ratio shows what proportion of a company’s assets is financed through debt, helping assess financial leverage.
Question 08
Which method of depreciation provides higher expense in the early years of an asset’s life and lower expenses in later years?
A. Straight-line
B. Activity method
C. Double declining balance
D. Units of production
Answer: C. Double declining balance
Explanation: The double declining balance method accelerates depreciation, resulting in higher expenses in the early years and lower charges in later years.
Question 09
What is the accounting treatment for interest costs incurred during the construction of a long-term asset?
A. Expensed immediately
B. Capitalized as part of the asset’s cost
C. Deducted from revenues
D. Deferred until the asset is placed in service
Answer: B. Capitalized as part of the asset’s cost
Explanation: Interest costs incurred during the construction of a long-term asset are capitalized and added to the asset’s cost, not expensed immediately.
Question 10
Which of the following statements about the straight-line method of depreciation is true?
A. It allocates higher depreciation in the earlier years
B. It charges the same amount of depreciation every year
C. It ignores the salvage value of the asset
D. It results in accelerated depreciation
Answer: B. It charges the same amount of depreciation every year
Explanation: The straight-line method allocates the same amount of depreciation every year over the asset’s useful life.
Question 11
A company’s net income is $500,000, and its net sales are $2,000,000. What is its profit margin?
A. 20%
B. 25%
C. 30%
D. 40%
Answer: B. 25%
Explanation: The profit margin is calculated by dividing net income by net sales, resulting in a profit margin of 25% ($500,000 ÷ $2,000,000).
Question 12
A company issued a bond with a discount. Which of the following is the correct journal entry to record this issuance?
A. Debit bonds payable, credit discount on bonds payable
B. Debit cash and discount on bonds payable, credit bonds payable
C. Debit bonds payable, credit cash
D. Debit cash, credit bonds payable and premium on bonds payable
Answer: B. Debit cash and discount on bonds payable, credit bonds payable
Explanation: When a bond is issued at a discount, the cash received is less than the face value, so the discount is debited along with cash.
Question 13
How is a contingent liability for a product warranty typically accounted for?
A. Recognized only when a claim is made
B. Expensed when a product is sold
C. Recorded when the liability becomes probable
D. Deferred until the warranty expires
Answer: B. Expensed when a product is sold
Explanation: Product warranties are accrued as a liability and expensed when the related product is sold, based on estimates of future claims.
Question 14
What is the journal entry to record bond interest payment on bonds issued at par?
A. Debit interest expense, credit cash
B. Debit interest payable, credit cash
C. Debit interest expense, credit interest payable
D. Debit cash, credit bonds payable
Answer: A. Debit interest expense, credit cash
Explanation: Bond interest payments are recorded by debiting interest expense and crediting cash when the payment is made.
Question 15
What is the depletion base for natural resources?
A. Acquisition cost only
B. Acquisition cost plus exploration, development, and restoration costs
C. Acquisition cost minus restoration costs
D. Acquisition cost minus development costs
Answer: B. Acquisition cost plus exploration, development, and restoration costs
Explanation: The depletion base for natural resources includes the acquisition cost as well as costs for exploration, development, and restoration.
Question 16
Which statement is true about the amortization of intangible assets?
A. Intangible assets with indefinite lives are amortized
B. Intangible assets are always amortized using the double-declining balance method
C. Intangible assets with finite lives are amortized
D. Intangible assets are amortized over 40 years
Answer: C. Intangible assets with finite lives are amortized
Explanation: Intangible assets with finite lives are amortized over their useful lives, whereas intangible assets with indefinite lives are not amortized.
Question 17
How is goodwill tested for impairment?
A. Based on the asset’s fair value
B. By calculating the present value of future cash flows
C. By comparing the carrying amount to the fair value of the reporting unit
D. Using the straight-line method
Answer: C. By comparing the carrying amount to the fair value of the reporting unit
Explanation: Goodwill impairment is tested by comparing the carrying amount of a reporting unit to its fair value; if the carrying amount exceeds fair value, impairment is recognized.
Question 18
What is the formula to calculate asset turnover?
A. Net income / average total assets
B. Net sales / average total assets
C. Total assets / total liabilities
D. Net income / total sales
Answer: B. Net sales / average total assets
Explanation: Asset turnover measures how efficiently a company uses its assets to generate sales, calculated by dividing net sales by average total assets.
Question 19
What method of depreciation uses a constant percentage of the asset’s book value each year?
A. Straight-line method
B. Sum-of-the-years’-digits method
C. Double-declining balance method
D. Units-of-production method
Answer: C. Double-declining balance method
Explanation: The double-declining balance method applies a constant depreciation rate to the declining book value of the asset each year, resulting in accelerated depreciation.
Question 20
A company issued bonds at a premium. What is the correct journal entry?
A. Debit cash, credit bonds payable and discount on bonds payable
B. Debit cash, credit bonds payable and premium on bonds payable
C. Debit bonds payable, credit premium on bonds payable
D. Debit premium on bonds payable, credit bonds payable
Answer: B. Debit cash, credit bonds payable and premium on bonds payable
Explanation: When bonds are issued at a premium, the premium is credited along with bonds payable, and the cash account is debited for the amount received.
