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web.groovymark@gmail.com
- December 12, 2024
Question 21
What happens to paid-in capital when treasury stock is sold above cost?
A. Paid-in capital increases
B. Paid-in capital decreases
C. Retained earnings increase
D. Retained earnings decrease
Answer: A. Paid-in capital increases
Explanation: When treasury stock is sold above cost, the excess is credited to paid-in capital from treasury stock transactions.
Question 22
How is a loss on the sale of treasury stock recorded?
A. Debit treasury stock, credit cash
B. Debit retained earnings, credit treasury stock
C. Debit cash, credit treasury stock and retained earnings
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 23
What is the journal entry for recording depletion of natural resources?
A. Debit cost of goods sold, credit inventory
B. Debit depletion expense, credit accumulated depletion
C. Debit accumulated depletion, credit inventory
D. Debit inventory, credit depletion expense
Answer: B. Debit depletion expense, credit accumulated depletion
Explanation: Depletion expense is recorded to allocate the cost of natural resources over their useful life, similar to depreciation.
Question 24
When is the restoration of an impairment loss permitted?
A. For all assets
B. For assets held for disposal
C. For assets held for use
D. For assets no longer in service
Answer: B. For assets held for disposal
Explanation: The restoration of an impairment loss is permitted only for assets held for disposal because they are not being actively used in operations.
Question 25
What is the accounting treatment for research and development (R&D) costs?
A. Capitalized as an asset
B. Expensed in the period incurred
C. Deferred until the project is complete
D. Recorded as a liability
Answer: B. Expensed in the period incurred
Explanation: R&D costs are expensed as incurred because their future benefits are uncertain and cannot be capitalized.
Question 26
What is the purpose of amortizing bond premiums?
A. To increase interest expense
B. To decrease interest expense
C. To reduce the carrying value of bonds payable
D. To increase the carrying value of bonds payable
Answer: B. To decrease interest expense
Explanation: Amortizing bond premiums reduces interest expense, as the premium represents income received in advance by the issuer.
Question 27
Which of the following is true about nonconvertible preferred stock?
A. It is considered a dilutive security
B. It can be converted into common stock
C. It cannot be converted into common stock
D. It has voting rights
Answer: C. It cannot be converted into common stock
Explanation: Nonconvertible preferred stock cannot be converted into common stock, unlike convertible preferred stock.
Question 28
What is the effect of a stock split on stockholders’ equity?
A. Increases stockholders’ equity
B. Decreases stockholders’ equity
C. No effect on stockholders’ equity
D. Increases retained earnings
Answer: C. No effect on stockholders' equity
Explanation: A stock split increases the number of shares and decreases the par value per share but does not affect total stockholders' equity.
Question 29
What happens to the carrying value of bonds issued at a premium over time?
A. The carrying value decreases
B. The carrying value increases
C. The carrying value stays constant
D. The carrying value fluctuates with market rates
Answer: A. The carrying value decreases
Explanation: As the bond premium is amortized, the carrying value decreases over time until it reaches face value at maturity.
Question 30
How is amortization of intangible assets with indefinite lives handled?
A. Amortized over the useful life
B. Not amortized, but tested annually for impairment
C. Expensed immediately
D. Capitalized
Answer: B. Not amortized, but tested annually for impairment
Explanation: Intangible assets with indefinite lives, such as goodwill, are not amortized but must be tested for impairment annually.
Question 31
Which of the following is considered an antidilutive security?
A. Convertible preferred stock
B. Nonconvertible preferred stock
C. Stock options
D. Warrants
Answer: B. Nonconvertible preferred stock
Explanation: Nonconvertible preferred stock cannot be converted into common stock and therefore cannot dilute earnings per share.
Question 32
What is the treatment for a zero-coupon bond?
A. Interest is paid periodically
B. Interest is paid at maturity
C. Interest is paid at issuance
D. Interest is not paid
Answer: B. Interest is paid at maturity
Explanation: Zero-coupon bonds do not pay interest periodically but are issued at a discount and pay the face value at maturity, including the accrued interest.
Question 33
What is the primary purpose of the acid-test ratio?
A. To assess a company’s liquidity
B. To measure profitability
C. To evaluate long-term solvency
D. To assess asset turnover
Answer: A. To assess a company's liquidity
Explanation: The acid-test ratio (or quick ratio) measures a company's ability to meet its short-term obligations with its most liquid assets.
Question 34
What happens when convertible bonds are converted into common stock?
A. Bonds payable is debited, and common stock is credited
B. Cash is debited, and bonds payable is credited
C. Bonds payable is credited, and common stock is debited
D. Common stock is debited, and cash is credited
Answer: A. Bonds payable is debited, and common stock is credited
Explanation: When convertible bonds are converted into common stock, the carrying value of the bonds is removed, and common stock is issued.
Question 35
What is the formula for the current ratio?
A. Total assets / Total liabilities
B. Current assets / Current liabilities
C. Current liabilities / Current assets
D. Net income / Total assets
Answer: B. Current assets / Current liabilities
Explanation: The current ratio measures a company’s ability to pay off its short-term obligations using its current assets.
Question 36
What is the primary function of a deferred tax liability?
A. To increase net income
B. To decrease tax expense
C. To represent future tax payments
D. To offset current tax liabilities
Answer: C. To represent future tax payments
Explanation: Deferred tax liabilities arise when taxable income is less than financial income due to temporary differences and represent future tax obligations.
Question 37
Which depreciation method provides higher charges in the earlier years?
A. Straight-line method
B. Units-of-production method
C. Double-declining balance method
D. Sum-of-the-years’-digits method
Answer: C. Double-declining balance method
Explanation: The double-declining balance method is an accelerated method, resulting in higher depreciation expenses in the earlier years of an asset's life.
Question 38
What is the treatment for warranties when the future cost can be reasonably estimated?
A. They are recognized as a liability when incurred
B. They are recognized as a liability when the product is sold
C. They are recognized as a liability when the customer files a claim
D. They are not recognized until costs are incurred
Answer: B. They are recognized as a liability when the product is sold
Explanation: Warranty liabilities are recorded when the product is sold, as the future costs can be reasonably estimated at that time.
Question 39
How is a gain on bond redemption recorded?
A. Debit bonds payable, credit gain on bond redemption
B. Debit cash, credit gain on bond redemption
C. Debit bonds payable, credit cash
D. Debit bonds payable, credit interest expense
Answer: A. Debit bonds payable, credit gain on bond redemption
Explanation: A gain on bond redemption is recorded when the reacquisition price is less than the carrying value of the bond.
Question 40
What is the effect of issuing stock options on stockholders’ equity?
A. Decreases stockholders’ equity
B. Increases stockholders’ equity
C. Increases retained earnings
D. Decreases retained earnings
Answer: B. Increases stockholders' equity
Explanation: Issuing stock options increases stockholders' equity by adding to paid-in capital as the options are exercised or vest.
