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web.groovymark@gmail.com
- December 12, 2024
Question 41
Which ratio is used to assess a company’s long-term solvency?
A. Profit margin
B. Current ratio
C. Debt-to-assets ratio
D. Asset turnover
Answer: C. Debt-to-assets ratio
Explanation: The debt-to-assets ratio measures a company’s financial leverage and its ability to meet long-term obligations.
Question 42
What is the effect of selling treasury stock at a price higher than the original purchase price?
A. Increases retained earnings
B. Decreases retained earnings
C. Increases paid-in capital
D. Decreases paid-in capital
Answer: C. Increases paid-in capital
Explanation: When treasury stock is sold at a price higher than the purchase price, the excess is credited to paid-in capital.
Question 43
How are interest payments on zero-coupon bonds recorded?
A. Debit interest expense, credit cash
B. Debit interest expense, credit bonds payable
C. Debit bonds payable, credit interest expense
D. Debit cash, credit bonds payable
Answer: B. Debit interest expense, credit bonds payable
Explanation: Zero-coupon bonds do not make regular interest payments, so interest expense is recorded by increasing the carrying value of the bonds payable.
Question 44
What happens to earnings per share (EPS) when a company buys back its own shares?
A. EPS decreases
B. EPS increases
C. EPS remains the same
D. EPS fluctuates randomly
Answer: B. EPS increases
Explanation: When a company repurchases its own shares, the number of shares outstanding decreases, which increases EPS.
Question 45
What is the accounting treatment for dividends declared but not yet paid?
A. Recorded as a liability
B. Recorded as an expense
C. Recorded as equity
D. Recorded as income
Answer: A. Recorded as a liability
Explanation: Once dividends are declared, they are recorded as a liability until they are paid to shareholders.
Question 46
Which depreciation method is often used for natural resources?
A. Straight-line method
B. Units-of-production method
C. Double-declining balance method
D. Sum-of-the-years’-digits method
Answer: B. Units-of-production method
Explanation: The units-of-production method is frequently used for natural resources because it allocates depreciation based on usage.
Question 47
What is the journal entry to record a gain on investment when a company declares a property dividend?
A. Debit investment in stock, credit gain on investment
B. Debit property dividends payable, credit gain on investment
C. Debit gain on investment, credit investment in stock
D. Debit property dividends payable, credit retained earnings
Answer: A. Debit investment in stock, credit gain on investment
Explanation: When a property dividend is declared, any gain on investment is recorded as a credit to gain on investment.
Question 48
What happens to retained earnings when dividends are paid out?
A. Retained earnings increase
B. Retained earnings decrease
C. Retained earnings remain the same
D. Retained earnings fluctuate based on stock price
Answer: B. Retained earnings decrease
Explanation: When dividends are paid out to shareholders, they reduce retained earnings, which represents accumulated profits.
Question 49
How is compensation expense for stock options measured?
A. Based on the fair value of the stock options at the grant date
B. Based on the market value of the stock on the exercise date
C. Based on the intrinsic value of the stock on the exercise date
D. Based on the fair value of the stock options on the vesting date
Answer: A. Based on the fair value of the stock options at the grant date
Explanation: Stock option compensation is measured at the fair value of the options on the grant date and expensed over the service period.
Question 50
What is the primary purpose of the profit margin on sales ratio?
A. To assess a company’s liquidity
B. To measure the percentage of revenue that becomes profit
C. To evaluate long-term solvency
D. To assess asset turnover
Answer: B. To measure the percentage of revenue that becomes profit
Explanation: The profit margin on sales ratio measures how much of a company’s revenue is turned into profit, providing insight into profitability.
