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- December 12, 2024
Question 01
Which depreciation method does not account for the salvage value when calculating depreciation?
A. Straight-line method
B. Sum-of-the-years’-digits method
C. Double-declining balance method
D. Units-of-production method
Answer: C. Double-declining balance method
Explanation: The double-declining balance method does not subtract the salvage value when computing depreciation, which differs from other methods.
Question 02
When a company issues stock for property or services, how should the stock be valued?
A. At par value
B. At book value
C. At the fair value of either the stock or the property/service received, whichever is more clearly determinable
D. At the historical cost of the stock
Answer: C. At the fair value of either the stock or the property/service received, whichever is more clearly determinable
Explanation: The general rule is to value the stock or the property/service at fair value, using whichever is more clearly determinable.
Question 03
What happens to the carrying value of a bond issued at a discount over time?
A. It decreases
B. It increases
C. It stays the same
D. It fluctuates
Answer: B. It increases
Explanation: As the discount is amortized over time, the carrying value of the bond increases until it equals the face value at maturity.
Question 04
How is amortization of bond discounts typically handled?
A. Increases interest expense
B. Decreases interest expense
C. Reduces cash flows
D. Increases cash flows
Answer: A. Increases interest expense
Explanation: Amortizing bond discounts increases interest expense because the discount represents additional interest that must be paid over time.
Question 05
How are employee stock purchase plans (ESPP) classified if they offer a discount of 5% or less?
A. They are compensatory
B. They are non-compensatory
C. They are considered a liability
D. They are treated as dividends
Answer: B. They are non-compensatory
Explanation: ESPPs are considered non-compensatory if the discount is 5% or less and all employees can participate equally.
Question 06
What is the effect on earnings per share (EPS) when a company converts its convertible bonds into common stock?
A. EPS decreases
B. EPS increases
C. EPS remains the same
D. EPS fluctuates randomly
Answer: A. EPS decreases
Explanation: Converting bonds into common stock increases the number of shares outstanding, which decreases earnings per share.
Question 07
What is the formula for calculating the payout ratio?
A. Net income / Common stockholders’ equity
B. Cash dividends / (Net income – Preferred dividends)
C. Net income / Average total assets
D. Cash dividends / Net sales
Answer: B. Cash dividends / (Net income – Preferred dividends)
Explanation: The payout ratio is the percentage of net income that is paid out as dividends to shareholders.
Question 08
When issuing convertible bonds, which method is used to allocate proceeds between the bond and the warrants if fair value is available?
A. Incremental method
B. Straight-line method
C. Proportional method
D. Effective interest method
Answer: C. Proportional method
Explanation: The proportional method is used when the fair value of both the bond and the warrants is known to allocate the proceeds accordingly.
Question 09
What is the effect of issuing stock options on net income?
A. Decreases net income
B. Increases net income
C. Has no effect on net income
D. Fluctuates net income
Answer: A. Decreases net income
Explanation: Issuing stock options reduces net income because the cost of the options is recognized as compensation expense.
Question 10
What is the accounting treatment for goodwill?
A. Amortized over its useful life
B. Tested annually for impairment
C. Expensed immediately
D. Capitalized and amortized over 20 years
Answer: B. Tested annually for impairment
Explanation: Goodwill is not amortized but is tested annually for impairment to ensure its carrying value is not overstated.
Question 11
What is a dilutive security?
A. A security that reduces earnings per share if converted
B. A security that increases earnings per share if converted
C. A security that has no effect on earnings per share
D. A security that cannot be converted
Answer: A. A security that reduces earnings per share if converted
Explanation: Dilutive securities, such as convertible bonds and stock options, have the potential to decrease earnings per share if exercised or converted.
Question 12
When is a bond classified as being sold at a discount?
A. When the market rate is equal to the stated rate
B. When the market rate is less than the stated rate
C. When the market rate is greater than the stated rate
D. When the bond pays no interest
Answer: C. When the market rate is greater than the stated rate
Explanation: A bond is sold at a discount when the market interest rate exceeds the stated rate on the bond, making it less attractive to investors.
Question 13
What is the journal entry to record a premium on bonds payable?
A. Debit cash, debit bonds payable, credit premium on bonds payable
B. Debit cash, credit bonds payable, credit premium on bonds payable
C. Debit premium on bonds payable, credit bonds payable, credit cash
D. Debit bonds payable, credit premium on bonds payable
Answer: B. Debit cash, credit bonds payable, credit premium on bonds payable
Explanation: When a bond is issued at a premium, cash is debited for the total amount received, and the premium is recorded as a separate credit.
Question 14
What is the primary purpose of the times interest earned ratio?
A. To assess a company’s liquidity
B. To measure a company’s ability to meet interest payments
C. To evaluate a company’s profitability
D. To assess a company’s asset turnover
Answer: B. To measure a company's ability to meet interest payments
Explanation: The times interest earned ratio measures how many times a company can cover its interest obligations with its earnings.
Question 15
What is the journal entry for recording the reacquisition of bonds at a price higher than the carrying value?
A. Debit bonds payable, debit loss on bond redemption, credit cash
B. Debit bonds payable, credit gain on bond redemption, credit cash
C. Debit loss on bond redemption, credit bonds payable, credit cash
D. Debit bonds payable, credit loss on bond redemption, credit cash
Answer: A. Debit bonds payable, debit loss on bond redemption, credit cash
Explanation: When bonds are reacquired for more than the carrying value, the difference is recorded as a loss on bond redemption.
Question 16
How are noncurrent liabilities reported on the balance sheet?
A. At their present value
B. At their future value
C. At par value
D. At their face value
Answer: A. At their present value
Explanation: Noncurrent liabilities are reported at their present value, which accounts for the time value of money.
Question 17
Which of the following is not a current liability?
A. Notes payable
B. Accounts payable
C. Bonds payable due in 10 years
D. Salaries payable
Answer: C. Bonds payable due in 10 years
Explanation: Bonds payable due in 10 years are considered noncurrent liabilities since they are not due within the next year.
Question 18
What is the accounting treatment for a contingent loss that is probable and estimable?
A. Recorded as a liability and charged to expense
B. Disclosed in the notes to the financial statements only
C. Not recorded or disclosed until the loss occurs
D. Recorded as a gain and recognized in equity
Answer: A. Recorded as a liability and charged to expense
Explanation: Contingent losses that are probable and reasonably estimable must be recorded as a liability and charged to expense.
Question 19
What is the purpose of the acid-test ratio?
A. To measure the effectiveness of asset management
B. To assess a company’s short-term liquidity
C. To evaluate a company’s profitability
D. To calculate the depreciation of assets
Answer: B. To assess a company’s short-term liquidity
Explanation: The acid-test ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Question 20
Which depreciation method assumes that depreciation is a function of time rather than usage?
A. Straight-line method
B. Units-of-production method
C. Double-declining balance method
D. Activity method
Answer: A. Straight-line method
Explanation: The straight-line method assumes depreciation is a function of time, applying the same expense amount each period over the asset’s life.