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web.groovymark@gmail.com
- December 12, 2024
Question 21
When is the cost of a stock warrant accounted for separately from the bond?
A. When the bond is issued at par
B. When the bond is issued with a discount
C. When the bond and the warrant can be traded separately
D. When the stock price is less than the bond’s stated interest
Answer: C. When the bond and the warrant can be traded separately
Explanation: Stock warrants are accounted for separately when they can be traded independently from the bond.
Question 22
What is the primary purpose of amortizing bond premiums or discounts?
A. To adjust cash flow
B. To account for interest rate fluctuations
C. To align the carrying value of the bond with its face value at maturity
D. To increase bond interest expense
Answer: C. To align the carrying value of the bond with its face value at maturity
Explanation: The amortization of bond premiums or discounts is done to ensure that the bond’s carrying value reaches its face value by maturity.
Question 23
How are depletion expenses recorded for natural resources?
A. By applying the straight-line method
B. Based on the units-of-production method
C. By applying the double-declining balance method
D. By allocating the total cost over time
Answer: B. Based on the units-of-production method
Explanation: Depletion expenses are calculated using the units-of-production method, which allocates costs based on resource extraction.
Question 24
What is the journal entry to record the sale of treasury stock above its cost?
A. Debit cash, credit treasury stock, credit additional paid-in capital
B. Debit treasury stock, credit cash, credit retained earnings
C. Debit additional paid-in capital, credit treasury stock, credit cash
D. Debit treasury stock, credit cash, credit additional paid-in capital
Answer: A. Debit cash, credit treasury stock, credit additional paid-in capital
Explanation: When treasury stock is sold above its cost, cash is debited, treasury stock is credited for its cost, and any excess is credited to additional paid-in capital.
Question 25
What is the effect of declaring a small stock dividend?
A. Total stockholders’ equity decreases
B. Total stockholders’ equity increases
C. Total stockholders’ equity remains unchanged
D. Retained earnings increase
Answer: C. Total stockholders’ equity remains unchanged
Explanation: A small stock dividend transfers amounts between retained earnings and paid-in capital, but total stockholders' equity remains unchanged.
Question 26
Which method of depreciation considers the use or productivity of an asset rather than the passage of time?
A. Straight-line method
B. Activity method
C. Declining-balance method
D. Sum-of-the-years’-digits method
Answer: B
Explanation: The activity method, also called the units-of-production method, depreciates an asset based on how much it is used rather than over a fixed period of time.
Question 27
Under which condition is the restoration of an impairment loss allowed?
A. For all tangible assets
B. For assets held for disposal
C. For assets held for use
D. For assets that have been sold
Answer: B
Explanation: Restoration of an impairment loss is only permitted for assets held for disposal, as they are remeasured at the lower of cost or net realizable value.
Question 28
What is the depletion base for natural resources?
A. Purchase price + Development costs – Salvage value
B. Purchase price + Intangible costs – Development costs
C. Purchase price + Exploration costs + Restoration costs – Salvage value
D. Purchase price – Salvage value
Answer: C
Explanation: The depletion base for natural resources includes acquisition, exploration, development costs, and restoration costs, minus the salvage value.
Question 29
How is the depletion rate for natural resources calculated?
A. (Total estimated units – Salvage value) / Total units to be recovered
B. (Depletion base – Salvage value) / Total units to be recovered
C. (Cost – Development costs) / Total estimated units
D. (Purchase price – Restoration costs) / Total recoverable units
Answer: B
Explanation: The depletion rate is calculated by dividing the depletion base, less any salvage value, by the total recoverable units of the natural resource.
Question 30
What type of bond has interest payments that are made periodically, and the face value is paid on the maturity date?
A. Zero-coupon bond
B. Serial bond
C. Convertible bond
D. Term bond
Answer: D
Explanation: A term bond has regular interest payments and pays the face value in a lump sum at maturity.
Question 31
How are impairment losses recorded in the journal entry?
A. Debit impairment loss, credit accumulated depreciation
B. Debit impairment expense, credit asset account
C. Debit impairment loss, credit cash
D. Debit accumulated depreciation, credit impairment loss
Answer: A
Explanation: Impairment losses reduce the carrying amount of the asset, which is usually done by increasing accumulated depreciation, with the loss recorded in the income statement.
Question 32
Which method calculates the depreciation charge by multiplying the declining book value by a constant rate?
A. Activity method
B. Double-declining balance method
C. Straight-line method
D. Sum-of-the-years’-digits method
Answer: B
Explanation: The double-declining balance method accelerates depreciation by applying a constant rate, which is usually twice the straight-line rate, to the declining book value of the asset.
Question 33
What is included in the journal entry when there is a gain on the sale of composite depreciation equipment?
A. Debit accumulated depreciation and equipment
B. Debit cash, credit accumulated depreciation
C. Credit gain on sale, credit accumulated depreciation
D. Debit cash, credit equipment and accumulated depreciation
Answer: D
Explanation: When equipment is sold, the cash received is debited, and the equipment's cost and accumulated depreciation are credited, with any gain recognized.
Question 34
Which depreciation method is used when the assets are dissimilar and have different lives?
A. Group method
B. Composite method
C. Declining-balance method
D. Straight-line method
Answer: B
Explanation: The composite method is used when assets are heterogeneous and have different useful lives, allowing them to be depreciated together.
Question 35
What happens to the par value of stock in a 2-for-1 stock split?
A. Par value remains the same
B. Par value doubles
C. Par value is halved
D. Par value decreases by 25%
Answer: C
Explanation: In a 2-for-1 stock split, the number of shares outstanding doubles, and the par value of the stock is reduced by half.
Question 36
What happens to Additional Paid-in Capital when treasury stock is reissued below cost?
A. It is debited to balance the entry
B. It is unaffected
C. It is credited to balance the entry
D. It is increased by the difference
Answer: A
Explanation: If treasury stock is sold for less than its cost, the difference is debited from Additional Paid-in Capital.
Question 37
When a company redeems bonds at a reacquisition price that is less than the carrying value, what is the result?
A. Loss on redemption
B. Gain on redemption
C. Increase in bonds payable
D. Decrease in cash account only
Answer: B
Explanation: If bonds are redeemed at a price lower than the carrying value, the company recognizes a gain on redemption.
Question 38
What is the correct journal entry for recording an accrued interest expense?
A. Debit interest expense, credit bonds payable
B. Debit interest payable, credit interest expense
C. Debit interest expense, credit interest payable
D. Debit bonds payable, credit interest payable
Answer: C
Explanation: Accrued interest is recorded by debiting interest expense and crediting interest payable, recognizing the obligation to pay interest.
Question 39
If the carrying amount of an asset exceeds its undiscounted future cash flows, what action should the company take?
A. Write off the entire asset
B. Recognize an impairment loss
C. Revalue the asset at fair value
D. Continue to depreciate the asset
Answer: B
Explanation: When the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment loss must be recognized.
Question 40
When is a gain on bond redemption recorded?
A. When the reacquisition price is greater than the carrying amount
B. When the reacquisition price is less than the carrying amount
C. When the bond is sold at a premium
D. When the bond is held to maturity
Answer: B
Explanation: A gain is recorded when bonds are redeemed for less than their carrying amount.
