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web.groovymark@gmail.com
- December 12, 2024
Question 01
What is the effect of recording depreciation using the straight-line method?
A. Higher expense in the early years
B. Equal expense each year
C. Lower expense in the early years
D. Accelerated expense in the final years
Answer: B. Equal expense each year
Explanation: The straight-line method allocates an equal amount of depreciation expense over the asset's useful life.
Question 02
Which depreciation method provides the greatest depreciation expense in the first year?
A. Double-declining balance method
B. Straight-line method
C. Activity method
D. Sum-of-the-years’-digits method
Answer: A. Double-declining balance method
Explanation: The double-declining balance method is an accelerated depreciation method, resulting in higher expenses in the early years.
Question 03
What is the formula for return on common stockholders’ equity?
A. Net income / Total liabilities
B. Net income – Preferred dividends / Average common stockholders’ equity
C. Net sales / Common stockholders’ equity
D. Net income / Shares outstanding
Answer: B. Net income - Preferred dividends / Average common stockholders' equity
Explanation: Return on common stockholders' equity measures the profitability of a company in relation to the common stockholders’ equity.
Question 04
What happens to retained earnings when a company issues a stock dividend?
A. Retained earnings increase
B. Retained earnings decrease
C. Retained earnings stay the same
D. Retained earnings are transferred to paid-in capital
Answer: B. Retained earnings decrease
Explanation: Stock dividends reduce retained earnings as they represent a distribution of additional shares to shareholders.
Question 05
How is interest expense on bonds calculated under the effective-interest method?
A. Face value × stated interest rate
B. Carrying value × effective interest rate
C. Carrying value × stated interest rate
D. Face value × effective interest rate
Answer: B. Carrying value × effective interest rate
Explanation: Under the effective-interest method, interest expense is calculated based on the carrying value of the bond multiplied by the effective interest rate.
Question 06
What is the treatment for sales of gift certificates that have not been redeemed?
A. Recognized as revenue
B. Recorded as a liability
C. Recorded as deferred revenue
D. Recorded as a gain
Answer: B. Recorded as a liability
Explanation: Unredeemed gift certificates are considered a liability until they are used by customers.
Question 07
What is the journal entry to record a loss on bond redemption?
A. Debit bonds payable, debit loss on bond redemption, credit cash
B. Debit bonds payable, credit cash, debit interest expense
C. Debit interest expense, credit bonds payable
D. Debit bonds payable, credit gain on bond redemption
Answer: A. Debit bonds payable, debit loss on bond redemption, credit cash
Explanation: A loss on bond redemption occurs when the reacquisition price exceeds the carrying amount of the bond.
Question 08
What is the journal entry to record a premium on bonds issued?
A. Debit cash, credit premium on bonds payable, credit bonds payable
B. Debit bonds payable, credit premium on bonds payable
C. Debit cash, credit bonds payable
D. Debit premium on bonds payable, credit cash
Answer: A. Debit cash, credit premium on bonds payable, credit bonds payable
Explanation: A bond premium occurs when bonds are issued above face value, and the premium is recorded separately.
Question 09
What is the formula for book value per share?
A. Common stockholders’ equity / Shares outstanding
B. Total liabilities / Shares outstanding
C. Net income / Shares outstanding
D. Common stockholders’ equity / Total liabilities
Answer: A. Common stockholders' equity / Shares outstanding
Explanation: Book value per share represents the equity available to common shareholders divided by the number of shares outstanding.
Question 10
Which type of bonds allow the issuer to repurchase before maturity?
A. Convertible bonds
B. Term bonds
C. Callable bonds
D. Zero-coupon bonds
Answer: C. Callable bonds
Explanation: Callable bonds give the issuer the right to redeem the bonds before the maturity date, often at a premium.
Question 11
What is the accounting treatment for contingent liabilities that are probable and reasonably estimable?
A. They are disclosed only in the footnotes
B. They are recorded in the financial statements as a liability
C. They are recorded as a gain
D. They are ignored
Answer: B. They are recorded in the financial statements as a liability
Explanation: Contingent liabilities that are probable and can be reasonably estimated are recorded as liabilities in the financial statements.
Question 12
What happens to the carrying value of bonds issued at a discount over time?
A. The carrying value decreases
B. The carrying value remains constant
C. The carrying value increases
D. The carrying value fluctuates based on interest rates
Answer: C. The carrying value increases
Explanation: As the discount is amortized, the carrying value of the bond increases until it reaches face value at maturity.
Question 13
What is the formula for 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 its interest expenses from earnings before interest and taxes.
Question 14
Which depreciation method is based on usage or production rather than time?
A. Straight-line method
B. Double-declining balance method
C. Units-of-production method
D. Sum-of-the-years’-digits method
Answer: C. Units-of-production method
Explanation: The units-of-production method allocates depreciation based on the asset's usage or production rather than the passage of time.
Question 15
How is goodwill treated on the balance sheet?
A. Amortized over time
B. Tested annually for impairment
C. Included in current assets
D. Written off immediately
Answer: B. Tested annually for impairment
Explanation: Goodwill is not amortized but must be tested annually for impairment to ensure its carrying value does not exceed its fair value.
Question 16
What is the effect of a 2-for-1 stock split?
A. Increases the total par value of shares
B. Decreases the par value per share
C. Decreases the number of shares outstanding
D. Reduces retained earnings
Answer: B. Decreases the par value per share
Explanation: A 2-for-1 stock split doubles the number of shares outstanding while halving the par value per share, leaving total equity unchanged.
Question 17
What is the formula for calculating earnings per share (EPS)?
A. Net income / Shares outstanding
B. Net income – Preferred dividends / Weighted average shares outstanding
C. Net income / Common stockholders’ equity
D. Net sales / Shares outstanding
Answer: B. Net income - Preferred dividends / Weighted average shares outstanding
Explanation: EPS measures the portion of a company's profit allocated to each outstanding share of common stock.
Question 18
How are dividends in arrears on cumulative preferred stock reported?
A. As an expense
B. As a liability
C. In the footnotes
D. As a reduction in retained earnings
Answer: C. In the footnotes
Explanation: Dividends in arrears on cumulative preferred stock are disclosed in the footnotes to the financial statements until they are declared.
Question 19
What is the effect of amortizing a bond discount?
A. Increases interest expense over time
B. Decreases interest expense over time
C. Has no effect on interest expense
D. Increases the carrying amount of bonds payable
Answer: A. Increases interest expense over time
Explanation: Amortizing a bond discount increases interest expense because the discount represents additional cost over the life of the bond.
Question 20
What is the proper treatment of stock options granted to employees?
A. Recognized as an expense immediately
B. Expensed over the service period
C. Recognized as a liability
D. Recorded as equity
Answer: B. Expensed over the service period
Explanation: Stock-based compensation is expensed over the service period, which is the period the employees are providing services in exchange for the options.
