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web.groovymark@gmail.com
- December 12, 2024
Question 01
What is the journal entry for recording the sale of treasury stock above cost?
A. Debit cash, credit treasury stock, credit paid-in capital
B. Debit treasury stock, credit cash
C. Debit paid-in capital, credit treasury stock
D. Debit cash, credit common stock
Answer: A. Debit cash, credit treasury stock, credit paid-in capital
Explanation: When treasury stock is sold above cost, the cash account is debited, and both treasury stock and paid-in capital are credited for the difference between the selling price and the cost.
Question 02
Which depreciation method does not consider the salvage value in computing depreciation?
A. Straight-line method
B. Activity method
C. Declining balance method
D. Sum-of-the-years’-digits method
Answer: C. Declining balance method
Explanation: The declining balance method applies a constant depreciation rate to the declining book value of the asset without deducting the salvage value.
Question 03
What is the accounting entry for a small stock dividend declared and distributed?
A. Debit retained earnings, credit common stock dividend distributable
B. Debit retained earnings, credit common stock and paid-in capital
C. Debit paid-in capital, credit common stock dividend distributable
D. Debit cash, credit common stock
Answer: B. Debit retained earnings, credit common stock and paid-in capital
Explanation: A small stock dividend reduces retained earnings and increases common stock and paid-in capital accounts for the value of the distributed shares.
Question 04
When should an impairment loss be recognized on a long-lived asset?
A. When the carrying amount exceeds the future cash flows
B. When the carrying amount exceeds the fair value
C. When the fair value is less than book value
D. When the asset is no longer in use
Answer: B. When the carrying amount exceeds the fair value
Explanation: Impairment losses are recognized when the carrying amount of an asset exceeds its fair value, indicating that the asset is not expected to recover its book value.
Question 05
What is the impact of purchasing treasury stock on stockholders’ equity?
A. Increases stockholders’ equity
B. Decreases stockholders’ equity
C. Has no impact on stockholders’ equity
D. Increases retained earnings
Answer: B. Decreases stockholders’ equity
Explanation: Treasury stock transactions reduce stockholders' equity because the company is buying back its own shares, decreasing the amount of equity in circulation.
Question 06
Which of the following is a characteristic of serial bonds?
A. They are redeemed in installments
B. They are redeemed in a lump sum at maturity
C. They are converted into stock
D. They are issued at a discount
Answer: A. They are redeemed in installments
Explanation: Serial bonds are structured to mature in installments, meaning the bond principal is repaid periodically over the bond's life.
Question 07
What is the entry to record bond interest payment with a discount at the end of the year?
Debit interest expense, credit cash and discount on bonds payable
B. Debit interest expense, credit cash
C. Debit cash, credit discount on bonds payable
D. Debit discount on bonds payable, credit cash
Answer: A. Debit interest expense, credit cash and discount on bonds payable
Explanation: When interest is paid on a bond issued at a discount, interest expense is debited for the total amount, and both cash and the discount account are credited.
Question 08
When is the restoration of an impairment loss allowed?
A. When the asset is held for use
B. When the asset is held for disposal
C. When the asset’s value increases
D. When the asset’s book value exceeds fair value
Answer: B. When the asset is held for disposal
Explanation: Restoration of an impairment loss is only allowed if the asset is held for disposal, as future cash flows are uncertain for assets held for use.
Question 09
What is the impact of a stock split on the total stockholders’ equity?
A. Decreases total stockholders’ equity
B. Increases total stockholders’ equity
C. Has no effect on total stockholders’ equity
D. Increases retained earnings
Answer: C. Has no effect on total stockholders’ equity
Explanation: A stock split does not change the total stockholders' equity because it only increases the number of shares outstanding and reduces the par value per share.
Question 10
What is the formula for calculating basic earnings per share (EPS)?
A. Net income / weighted average shares outstanding
B. Net income – preferred dividends / total shares outstanding
C. Net income / total shares outstanding
D. Net income – preferred dividends / weighted average shares outstanding
Answer: D. Net income - preferred dividends / weighted average shares outstanding
Explanation: Basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average number of common shares outstanding.
Question 11
Which financial ratio measures a company’s profitability relative to its average total assets?
A. Return on assets
B. Profit margin on sales
C. Asset turnover
D. Return on equity
Answer: A. Return on assets
Explanation: The return on assets ratio measures how effectively a company uses its assets to generate profit.
Question 12
How are bond issuance costs treated in financial statements?
A. Expensed immediately
B. Capitalized as part of the bond’s carrying value
C. Amortized over the life of the bond
D. Deducted from retained earnings
Answer: C. Amortized over the life of the bond
Explanation: Bond issuance costs are amortized over the life of the bond as an expense, rather than expensed immediately.
Question 13
How are unrealized gains on available-for-sale securities reported?
A. As other comprehensive income
B. As revenue
C. As an extraordinary item
D. As part of net income
Answer: A. As other comprehensive income
Explanation: Unrealized gains and losses on available-for-sale securities are reported as part of other comprehensive income until they are realized.
Question 14
Which of the following is true regarding the straight-line method of depreciation?
It results in a higher depreciation expense in the early years
B. It results in the same depreciation expense each year
C. It does not account for salvage value
D. It results in lower depreciation in the early years
Answer: B. It results in the same depreciation expense each year
Explanation: The straight-line method allocates an equal amount of depreciation expense to each period over the asset’s useful life.
Question 15
How is a contingent gain treated under GAAP?
A. Recognized when probable
B. Disclosed in the financial statements
C. Recorded as a liability
D. Recognized when realized
Answer: D. Recognized when realized
Explanation: Contingent gains are not recognized in financial statements until they are realized, unlike contingent liabilities which can be recognized if probable and estimable.
Question 16
What is the treatment of development costs for natural resources?
A. Capitalized as part of the depletion base
B. Expensed immediately
C. Treated as operating expenses
D. Deducted from revenue
Answer: A. Capitalized as part of the depletion base
Explanation: Development costs for natural resources are capitalized and included in the depletion base, along with other costs necessary for the resource extraction.
Question 17
Which method of depreciation is appropriate for assets with consistent use throughout their life?
A. Activity method
B. Sum-of-the-years’-digits method
C. Declining balance method
D. Straight-line method
Answer: D. Straight-line method
Explanation: The straight-line method is appropriate for assets with consistent usage, as it allocates an equal depreciation expense over the asset's useful life.
Question 18
What is the accounting entry for recording amortization expense on intangible assets?
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 of intangible assets is recorded by debiting amortization expense and crediting accumulated amortization, similar to depreciation for tangible assets.
Question 19
How should the fair value of land be recorded when it is acquired in exchange for stock?
A. At book value
B. At par value of the stock issued
C. At the fair value of the land or stock, whichever is more determinable
D. At the fair value of the land only
- At the fair value of the land only
Answer: C. At the fair value of the land or stock, whichever is more determinable
Explanation: When land is acquired in exchange for stock, the land should be recorded at the fair value of either the land or the stock, depending on which is more reliably determined.
Question 20
Which of the following is considered an extraordinary gain or loss?
A. Sale of inventory
B. Lawsuit settlement
C. Write-off of goodwill
D. Damage from a natural disaster
Answer: D. Damage from a natural disaster
Explanation: Extraordinary gains or losses result from unusual and infrequent events, such as damage from a natural disaster, which are not part of the normal business operations.
