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web.groovymark@gmail.com
- December 12, 2024
Question 21
What is the formula for the times interest earned ratio?
A. Net income / Interest expense
B. (Net income + Interest expense + Income tax expense) / Interest expense
C. Operating income / Interest expense
D. Net sales / Interest expense
Answer: B. (Net income + Interest expense + Income tax expense) / Interest expense
Explanation: The times interest earned ratio measures a company’s ability to cover interest expenses with its earnings before interest and taxes (EBIT).
Question 22
When a company acquires its own stock, how is it recorded?
A. Debit common stock, credit retained earnings
B. Debit treasury stock, credit cash
C. Debit retained earnings, credit cash
D. Debit paid-in capital, credit treasury stock
Answer: B. Debit treasury stock, credit cash
Explanation: The acquisition of treasury stock is recorded by debiting the treasury stock account and crediting cash for the amount paid.
Question 23
Which of the following is a key feature of callable bonds?
A. The bondholder can redeem the bonds at a specified price before maturity
B. The issuer can repay the bonds before maturity
C. The bonds automatically convert into stock
D. The bonds are not redeemable before maturity
Answer: B. The issuer can repay the bonds before maturity
Explanation: Callable bonds give the issuer the option to repay the bonds before the maturity date, typically at a premium.
Question 24
What is the effect of amortizing bond premium on interest expense?
A. Increases interest expense
B. Decreases interest expense
C. Has no effect on interest expense
D. Increases the carrying amount of bonds payable
Answer: B. Decreases interest expense
Explanation: Amortizing bond premium decreases interest expense because the premium reduces the amount of interest the company needs to pay over the life of the bond.
Question 25
How are contingent liabilities reported in financial statements?
A. Always recognized in the financial statements
B. Recognized when probable and reasonably estimable
C. Never recognized, only disclosed in footnotes
D. Recognized when possible but not probable
Answer: B. Recognized when probable and reasonably estimable
Explanation: Contingent liabilities are recognized in financial statements if they are both probable and the amount can be reasonably estimated.
Question 26
Which of the following represents a reduction in paid-in capital?
A. Payment of dividends
B. Issuance of bonds at a discount
C. Retirement of treasury stock
D. Stock split
Answer: C. Retirement of treasury stock
Explanation: When treasury stock is retired, the paid-in capital associated with the stock is reduced because the shares are removed from circulation.
Question 27
What is the effect of a stock dividend on retained earnings?
A. Decreases retained earnings
B. Increases retained earnings
C. Has no effect on retained earnings
D. Decreases paid-in capital
Answer: A. Decreases retained earnings
Explanation: Stock dividends reduce retained earnings because they represent a distribution of additional shares to shareholders, reducing the company’s accumulated profits.
Question 28
What does the acid-test ratio measure?
A. Profitability
B. Liquidity
C. Solvency
D. Asset turnover
Answer: B. Liquidity
Explanation: The acid-test ratio measures a company’s ability to cover its short-term liabilities with its most liquid assets, excluding inventory.
Question 29
How is goodwill tested for impairment?
A. Amortized over 10 years
B. Tested for impairment annually
C. Written off immediately
D. Included in the depletion base
Answer: B. Tested for impairment annually
Explanation: Goodwill is not amortized, but it must be tested annually for impairment to ensure its carrying value is recoverable.
Question 30
How should companies account for stock-based compensation?
A. Expense over the service period
B. Recognize immediately
C. Capitalize as part of equity
D. Record as a liability
Answer: A. Expense over the service period
Explanation: Stock-based compensation is recognized as an expense over the service period during which employees provide the services in exchange for stock options.
Question 31
What is the formula for calculating book value per share?
A. Total liabilities / shares outstanding
B. Common stockholders’ equity / shares outstanding
C. Total stockholders’ equity / shares outstanding
D. Retained earnings / shares outstanding
Answer: B. Common stockholders' equity / shares outstanding
Explanation: Book value per share is calculated by dividing common stockholders' equity by the number of outstanding shares of common stock.
Question 32
Which method of depreciation provides higher expenses in the early years?
A. Straight-line method
B. Sum-of-the-years’-digits method
C. Units-of-production method
D. Double-declining balance method
Answer: D. Double-declining balance method
Explanation: The double-declining balance method is an accelerated depreciation method that results in higher depreciation expenses in the early years of an asset's life.
Question 33
What is the proper treatment for recording a gain on the reacquisition of bonds?
A. Debit cash, credit bonds payable and gain on bond redemption
B. Debit bonds payable, credit cash and gain on bond redemption
C. Debit cash, credit bonds payable and gain on extinguishment
D. Debit bonds payable, credit gain on bond redemption and cash
Answer: B. Debit bonds payable, credit cash and gain on bond redemption
Explanation: When bonds are reacquired at a price less than the carrying amount, a gain is recorded as the difference between the carrying value and the reacquisition price.
Question 34
What is the formula for calculating return on equity (ROE)?
Net income / average common stockholders’ equity
B. Net income / average total assets
C. Net income / total stockholders’ equity
D. Net income / weighted average shares outstanding
Answer: A. Net income / average common stockholders' equity
Explanation: Return on equity measures the profitability of a company relative to the equity invested by common stockholders.
Question 35
What is the accounting treatment for sales of gift certificates that have not been redeemed?
A. Recognized as revenue
B. Recorded as a liability
C. Recorded as a gain
D. Recorded as cash sales
Answer: B. Recorded as a liability
Explanation: Gift certificates that have been sold but not yet redeemed are recorded as a liability (unearned revenue) until the certificate is used.
Question 36
When bonds are issued at a discount, how is interest expense recorded under the effective-interest method?
A. Interest expense increases over time
B. Interest expense remains the same
C. Interest expense decreases over time
D. Interest expense is recorded at the face value
Answer: A. Interest expense increases over time
Explanation: Under the effective-interest method, interest expense increases over time as the discount is amortized, increasing the carrying value of the bond.
Question 37
What is the accounting entry for the redemption of bonds at a loss?
A. Debit bonds payable, debit loss on bond redemption, credit cash
B. Debit bonds payable, credit loss on bond redemption, credit cash
C. Debit cash, debit loss on bond redemption, credit bonds payable
D. Debit bonds payable, credit cash, debit retained earnings
Answer: A. Debit bonds payable, debit loss on bond redemption, credit cash
Explanation: When bonds are redeemed at a price higher than the carrying value, the company debits the bond payable and loss on redemption accounts and credits cash.
Question 38
What is the accounting treatment for stock dividends?
A. Increases retained earnings
B. Decreases retained earnings
C. Recorded as a liability
D. Increases paid-in capital
Answer: B. Decreases retained earnings
Explanation: Stock dividends reduce retained earnings because they represent a distribution of additional shares from retained earnings to shareholders.
Question 39
How is a loss on the sale of treasury stock recorded?
Debit treasury stock, credit cash and paid-in capital
B. Debit retained earnings, credit treasury stock
C. Debit cash, debit paid-in capital, credit treasury stock
D. Debit retained earnings, credit paid-in capital
Answer: B. Debit retained earnings, credit treasury stock
Explanation: A loss on the sale of treasury stock is debited to retained earnings if there is no balance in the paid-in capital account for treasury stock transactions.
Question 40
Which depreciation method results in decreasing annual depreciation expenses over the asset’s life?
A. Straight-line method
B. Double-declining balance method
C. Activity method
D. Units-of-production method
Answer: B. Double-declining balance method
Explanation: The double-declining balance method results in decreasing depreciation expenses each year, as the book value of the asset decreases.
