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web.groovymark@gmail.com
- December 12, 2024
Question 21
How is the journal entry recorded when gift cards are redeemed by customers?
A. Debit sales revenue, credit unearned gift card revenue
B. Debit unearned gift card revenue, credit sales revenue
C. Debit cash, credit unearned gift card revenue
D. Debit unearned gift card revenue, credit cash
Answer: B. Debit unearned gift card revenue, credit sales revenue
Explanation: When a customer redeems a gift card, the unearned revenue is recognized as sales revenue by debiting unearned gift card revenue and crediting sales revenue.
Question 22
What does the times interest earned ratio measure?
A. The ability of a company to pay dividends
B. A company’s profitability
C. The ability of a company to meet its interest obligations
D. The company’s liquidity
Answer: C. The ability of a company to meet its interest obligations
Explanation: The times interest earned ratio indicates how many times a company can cover its interest expenses with its earnings before interest and taxes.
Question 23
When should a company recognize a contingent liability?
A. When the liability is probable and can be reasonably estimated
B. Only when the liability is certain
C. When the liability cannot be estimated
D. When the liability is remote
Answer: A. When the liability is probable and can be reasonably estimated
Explanation: Contingent liabilities are recognized when it is probable that a loss will occur and the amount of the loss can be reasonably estimated.
Question 24
How is a small stock dividend typically recorded?
A. Debit retained earnings, credit common stock and paid-in capital
B. Debit retained earnings, credit cash
C. Debit common stock, credit paid-in capital
D. Debit cash, credit common stock
Answer: A. Debit retained earnings, credit common stock and paid-in capital
Explanation: A small stock dividend is recorded by debiting retained earnings and crediting common stock and paid-in capital in excess of par for the value of the shares distributed.
Question 25
How does a stock split affect the par value of a company’s stock?
A. Increases par value
B. Decreases par value
C. Eliminates par value
D. Has no effect on par value
Answer: B. Decreases par value
Explanation: A stock split increases the number of shares outstanding and decreases the par value per share without affecting total stockholders' equity.
Question 26
Which of the following is included in the depletion base for natural resources?
A. Salvage value
B. Intangible development costs
C. Estimated restoration costs
D. A and B
Answer: D. A and B
Explanation: The depletion base includes the acquisition cost, exploration costs, intangible development costs, and restoration costs associated with extracting natural resources.
Question 27
What is the journal entry for recognizing depletion of a natural resource?
A. Debit accumulated depletion, credit depletion expense
B. Debit depletion expense, credit accumulated depletion
C. Debit depletion expense, credit inventory
D. Debit inventory, credit depletion expense
Answer: B. Debit depletion expense, credit accumulated depletion
Explanation: Depletion is recorded by debiting depletion expense and crediting accumulated depletion for the amount of the resource extracted.
Question 28
What is the formula for the return on assets ratio?
A. Net sales / average total assets
B. Net income / average total assets
C. Net income / net sales
D. Total liabilities / total assets
Answer: B. Net income / average total assets
Explanation: Return on assets measures how effectively a company uses its assets to generate profit, calculated by dividing net income by average total assets.
Question 29
Which of the following is considered a dilutive security?
A. Convertible bonds
B. Cumulative preferred stock
C. Nonconvertible bonds
D. Participating preferred stock
Answer: A. Convertible bonds
Explanation: Convertible bonds are considered dilutive securities because they can be converted into common stock, potentially reducing earnings per share.
Question 30
What type of stock can be converted into common stock at the discretion of the holder?
A. Preferred stock
B. Convertible preferred stock
C. Cumulative preferred stock
D. Treasury stock
Answer: B. Convertible preferred stock
Explanation: Convertible preferred stock gives the holder the right to convert their preferred shares into common stock, usually at a predetermined ratio.
Question 31
What is the accounting entry when a bond is retired at a premium?
A. Debit bonds payable, debit loss on retirement, credit cash
B. Debit bonds payable, credit cash and gain on retirement
C. Debit bonds payable, credit cash and premium on bonds payable
D. Debit cash, credit bonds payable and premium on bonds payable
Answer: C. Debit bonds payable, credit cash and premium on bonds payable
Explanation: When bonds are retired at a premium, the bonds payable and premium on bonds payable are debited, and cash is credited for the amount paid.
Question 32
Which type of bond allows the issuer to retire the bonds before the maturity date?
A. Convertible bonds
B. Callable bonds
C. Zero-coupon bonds
D. Serial bonds
Answer: B. Callable bonds
Explanation: Callable bonds give the issuer the right to redeem the bonds before their maturity date, usually at a specified price.
Question 33
Which type of bond pays interest only at maturity and not periodically?
A. Callable bonds
B. Convertible bonds
C. Zero-coupon bonds
D. Serial bonds
Answer: C. Zero-coupon bonds
Explanation: Zero-coupon bonds do not pay periodic interest; instead, they are issued at a discount and pay the full face value at maturity.
Question 34
How is a contingent gain recorded?
A. Recorded when realized
B. Accrued when probable
C. Accrued when estimable
D. Recorded as a liability
Answer: A. Recorded when realized
Explanation: Contingent gains are only recorded when they are realized, unlike contingent liabilities, which are accrued if probable and estimable.
Question 35
A company buys land for $5,000,000 and incurs an additional $500,000 in demolition costs. How should the demolition costs be treated?
A. Expensed immediately
B. Added to the cost of land
C. Amortized over the land’s useful life
D. Added to the cost of future buildings
Answer: B. Added to the cost of land
Explanation: Demolition costs incurred to prepare land for use are added to the land’s acquisition cost, rather than expensed or amortized.
Question 36
What happens to the book value of an asset if it is impaired?
A. Book value remains the same
B. Book value increases
C. Book value decreases
D. Book value depends on future cash flows
Answer: C. Book value decreases
Explanation: When an asset is impaired, its book value is written down to its recoverable amount, resulting in a decrease in the book value.
Question 37
What is the accounting treatment for goodwill when a company is sold?
A. Goodwill is capitalized
B. Goodwill is expensed immediately
C. Goodwill is included in the acquisition price
D. Goodwill is amortized over 10 years
Answer: C. Goodwill is included in the acquisition price
Explanation: When a company is sold, the purchase price includes goodwill, which represents the excess of the purchase price over the fair value of identifiable net assets.
Question 38
Which method of depreciation allocates a higher expense in the earlier years and lower expense in later years?
A. Straight-line method
B. Activity method
C. Declining balance method
D. Sum-of-the-years’-digits method
Answer: D. Sum-of-the-years’-digits method
Explanation: The sum-of-the-years’-digits method is an accelerated depreciation method that allocates higher depreciation in the early years and lower expenses in the later years.
Question 39
What is the journal entry for recognizing amortization expense on an intangible asset?
A. Debit amortization expense, credit accumulated amortization
B. Debit intangible asset, credit accumulated amortization
C. Debit accumulated amortization, credit amortization expense
D. Debit amortization expense, credit intangible asset
Answer: A. Debit amortization expense, credit accumulated amortization
Explanation: Amortization expense is recognized by debiting amortization expense and crediting accumulated amortization, similar to depreciation for tangible assets.
Question 40
A company has bonds outstanding with a face value of $500,000 and a carrying amount of $480,000. If the company repays the bonds at 101, what is the correct journal entry?
Debit bonds payable, debit loss on bond redemption, credit cash
B. Debit bonds payable, credit cash
C. Debit bonds payable, debit loss on bond redemption, credit cash and premium on bonds payable
D. Debit cash, credit bonds payable
Answer: A. Debit bonds payable, debit loss on bond redemption, credit cash
Explanation: When bonds are repaid at a price above their carrying amount, a loss is recognized, and the entry debits bonds payable and the loss on bond redemption, while cash is credited.
