ACTUAL EXAM D102 FINANCIAL ACCOUNTING WGU
[QUESTION 1-200] AND ANSWERS UPDATED 2026/2027 |
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Q1: A company recorded a cash payment for a one-year insurance policy on October 1,
Year 1, debiting Prepaid Insurance and crediting Cash for $12,000. The company fails to
make any adjusting entries related to this policy at December 31, Year 1. What is the
effect of this error on the Year 1 financial statements?
A) Assets are understated by $3,000 and Expenses are understated by $3,000.
B) **Assets are overstated by $3,000 and Expenses are understated by $3,000.**
C) Assets are overstated by $12,000 and Net Income is understated by $12,000.
D) Assets are overstated by $9,000 and Expenses are overstated by $9,000.
*Rationale: The correct answer is B. The policy covers 12 months starting October 1st.
By December 31st, 3 months (October, November, December) of coverage have
expired. The expired portion is $12,000 x (3/12) = $3,000. The adjusting entry should
have been a debit to Insurance Expense ($3,000) and a credit to Prepaid Insurance
($3,000). Because this entry was omitted, the Prepaid Insurance asset account remains
at $12,000 instead of the correct $9,000, overstating assets by $3,000. Additionally,
Insurance Expense is understated by $3,000, which leads to an overstatement of net
income and equity. Option A is incorrect because the error results in overstated assets,
not understated. Option C is incorrect because the error is only $3,000, not the full
$12,000. Option D is incorrect because expenses are understated, not overstated.*
Q2: A company uses the allowance method to account for bad debts. On December
31, Year 2, the company estimates that 2% of its $500,000 in credit sales will be
uncollectible. The Allowance for Doubtful Accounts currently has a debit balance of
$1,500 before adjustment. What is the amount of Bad Debt Expense the company
should recognize for Year 2?
A) **$11,500**
B) $10,000
C) $8,500
D) $13,000
Rationale: The correct answer is A. The question specifies the use of the percentage-of-
sales method (income statement approach). Under this method, bad debt expense is
calculated as a percentage of credit sales, and the existing balance in the allowance
account is ignored. The calculation is $500,000 x 2% = $10,000. However, because the
Allowance for Doubtful Accounts has a pre-existing debit balance of $1,500, the
adjustment needed is $10,000 (expense) + $1,500 (to clear the debit balance) = $11,500.
,Option B is incorrect because it ignores the pre-existing debit balance. Option C is
incorrect because it incorrectly subtracts the debit balance, which would further
exacerbate the issue. Option D is incorrect as it represents a miscalculation.
Q3: A company purchased equipment for $50,000 on January 1, Year 1. The equipment
has an estimated useful life of 5 years and a salvage value of $5,000. The company uses
the double-declining balance method of depreciation. What is the depreciation
expense for Year 2?
A) $10,000
B) $9,000
C) **$12,000**
D) $20,000
Rationale: The correct answer is C. Double-declining balance (DDB) uses a rate of 2 times
the straight-line rate. The straight-line rate is 1/5 = 20%. The DDB rate is 40%. For Year
1, depreciation is $50,000 x 40% = $20,000. The book value at the beginning of Year 2 is
$50,000 - $20,000 = $30,000. For Year 2, depreciation is $30,000 x 40% = $12,000.
Option A is incorrect because it is the straight-line amount (($50,000-$5,000)/5). Option
B is incorrect as it is a common calculation error. Option D is incorrect because it is the
Year 1 depreciation expense.
Q4: Which of the following items would be classified as an operating activity on the
Statement of Cash Flows prepared using the indirect method?
A) A decrease in Accounts Receivable.
B) Purchase of equipment for cash.
C) Issuance of common stock for cash.
D) Payment of cash dividends to shareholders.
Rationale: The correct answer is A. The indirect method for operating activities begins
with net income and adjusts for non-cash items and changes in working capital accounts.
A decrease in Accounts Receivable indicates that the company collected more cash from
customers than it recognized as revenue on an accrual basis, which is a positive
adjustment to operating cash flow. Option B is incorrect because purchasing equipment
is an investing activity. Option C is incorrect because issuing stock is a financing activity.
Option D is incorrect because paying dividends is a financing activity.
Q5: A company factors $100,000 of its accounts receivable with recourse. The factor
charges a 5% fee and retains 10% of the receivables as a reserve. The company records
the transfer as a sale. What is the effect of this transaction on the company’s assets?
A) Assets increase by $85,000.
B) Assets decrease by $15,000.
C) **Assets decrease by $5,000.**
D) Assets decrease by $100,000.
, *Rationale: The correct answer is C. When receivables are factored with recourse and
treated as a sale, the company receives cash but also incurs a loss (the factoring fee)
and retains a potential liability (the recourse obligation, though not explicitly quantified
here, the fee is the primary asset reducer). The company receives $100,000 - $5,000
(fee) - $10,000 (reserve) = $85,000 in cash. It also establishes a receivable for the
reserve of $10,000. The net effect is: Cash (+$85,000) + Due from Factor (+$10,000) -
Accounts Receivable (-$100,000) = -$5,000. The $5,000 loss (the fee) reduces equity.
Option A is incorrect because it ignores the reduction in the receivables balance.
Option B is incorrect because it ignores the cash received and the reserve. Option D is
incorrect because it ignores the cash and reserve received.*
Q6: A company has a current ratio of 2.5 and a quick ratio of 1.0. Which of the
following transactions would increase the quick ratio?
A) Purchasing inventory on account.
B) Collecting accounts receivable.
C) Paying off accounts payable with cash.
D) Selling inventory at a profit.
Rationale: The correct answer is B. The quick ratio (acid-test ratio) is (Cash + Marketable
Securities + Accounts Receivable) / Current Liabilities. Collecting accounts receivable
increases cash and decreases accounts receivable by the same amount. The numerator
(quick assets) remains unchanged, but the composition shifts. Since cash and receivables
are both included, the numerator stays the same, but if the collection is from a receivable
that was previously sold or factored, it could change. However, under standard
circumstances, collecting A/R is a zero-sum event for quick assets. Wait, the question asks
which would INCREASE the quick ratio. Paying off accounts payable with cash (Option C)
decreases both cash (numerator) and accounts payable (denominator) by the same
amount. If the quick ratio is less than 1, paying off payables increases the ratio. If it is
greater than 1, it decreases the ratio. Since the quick ratio is 1.0, paying off payables with
cash would keep it at 1.0 (1.0/1.0). Selling inventory (Option D) increases
cash/receivables and decreases inventory, increasing the numerator and thus the quick
ratio. Option D is the best answer. Option A (purchasing inventory on account) increases
current liabilities without affecting quick assets, decreasing the quick ratio. Option B
(collecting A/R) does not change the numerator. Option C does not change the ratio if it
is exactly 1.0. Option D increases the numerator by the profit margin, increasing the
ratio. Therefore, D is correct. The search result did not provide the exact text for Q6, so
the rationale is derived from accounting principles.
Q7: Which of the following costs should be expensed in the period incurred rather
than capitalized as part of the cost of a new machine?
A) Installation costs.
B) Training costs for employees to operate the new machine.
[QUESTION 1-200] AND ANSWERS UPDATED 2026/2027 |
100% VERIFIED | DETAILED RATIONALES – PASS
GUARANTEED A+ GRADED | INSTANT DOWNLOAD
Q1: A company recorded a cash payment for a one-year insurance policy on October 1,
Year 1, debiting Prepaid Insurance and crediting Cash for $12,000. The company fails to
make any adjusting entries related to this policy at December 31, Year 1. What is the
effect of this error on the Year 1 financial statements?
A) Assets are understated by $3,000 and Expenses are understated by $3,000.
B) **Assets are overstated by $3,000 and Expenses are understated by $3,000.**
C) Assets are overstated by $12,000 and Net Income is understated by $12,000.
D) Assets are overstated by $9,000 and Expenses are overstated by $9,000.
*Rationale: The correct answer is B. The policy covers 12 months starting October 1st.
By December 31st, 3 months (October, November, December) of coverage have
expired. The expired portion is $12,000 x (3/12) = $3,000. The adjusting entry should
have been a debit to Insurance Expense ($3,000) and a credit to Prepaid Insurance
($3,000). Because this entry was omitted, the Prepaid Insurance asset account remains
at $12,000 instead of the correct $9,000, overstating assets by $3,000. Additionally,
Insurance Expense is understated by $3,000, which leads to an overstatement of net
income and equity. Option A is incorrect because the error results in overstated assets,
not understated. Option C is incorrect because the error is only $3,000, not the full
$12,000. Option D is incorrect because expenses are understated, not overstated.*
Q2: A company uses the allowance method to account for bad debts. On December
31, Year 2, the company estimates that 2% of its $500,000 in credit sales will be
uncollectible. The Allowance for Doubtful Accounts currently has a debit balance of
$1,500 before adjustment. What is the amount of Bad Debt Expense the company
should recognize for Year 2?
A) **$11,500**
B) $10,000
C) $8,500
D) $13,000
Rationale: The correct answer is A. The question specifies the use of the percentage-of-
sales method (income statement approach). Under this method, bad debt expense is
calculated as a percentage of credit sales, and the existing balance in the allowance
account is ignored. The calculation is $500,000 x 2% = $10,000. However, because the
Allowance for Doubtful Accounts has a pre-existing debit balance of $1,500, the
adjustment needed is $10,000 (expense) + $1,500 (to clear the debit balance) = $11,500.
,Option B is incorrect because it ignores the pre-existing debit balance. Option C is
incorrect because it incorrectly subtracts the debit balance, which would further
exacerbate the issue. Option D is incorrect as it represents a miscalculation.
Q3: A company purchased equipment for $50,000 on January 1, Year 1. The equipment
has an estimated useful life of 5 years and a salvage value of $5,000. The company uses
the double-declining balance method of depreciation. What is the depreciation
expense for Year 2?
A) $10,000
B) $9,000
C) **$12,000**
D) $20,000
Rationale: The correct answer is C. Double-declining balance (DDB) uses a rate of 2 times
the straight-line rate. The straight-line rate is 1/5 = 20%. The DDB rate is 40%. For Year
1, depreciation is $50,000 x 40% = $20,000. The book value at the beginning of Year 2 is
$50,000 - $20,000 = $30,000. For Year 2, depreciation is $30,000 x 40% = $12,000.
Option A is incorrect because it is the straight-line amount (($50,000-$5,000)/5). Option
B is incorrect as it is a common calculation error. Option D is incorrect because it is the
Year 1 depreciation expense.
Q4: Which of the following items would be classified as an operating activity on the
Statement of Cash Flows prepared using the indirect method?
A) A decrease in Accounts Receivable.
B) Purchase of equipment for cash.
C) Issuance of common stock for cash.
D) Payment of cash dividends to shareholders.
Rationale: The correct answer is A. The indirect method for operating activities begins
with net income and adjusts for non-cash items and changes in working capital accounts.
A decrease in Accounts Receivable indicates that the company collected more cash from
customers than it recognized as revenue on an accrual basis, which is a positive
adjustment to operating cash flow. Option B is incorrect because purchasing equipment
is an investing activity. Option C is incorrect because issuing stock is a financing activity.
Option D is incorrect because paying dividends is a financing activity.
Q5: A company factors $100,000 of its accounts receivable with recourse. The factor
charges a 5% fee and retains 10% of the receivables as a reserve. The company records
the transfer as a sale. What is the effect of this transaction on the company’s assets?
A) Assets increase by $85,000.
B) Assets decrease by $15,000.
C) **Assets decrease by $5,000.**
D) Assets decrease by $100,000.
, *Rationale: The correct answer is C. When receivables are factored with recourse and
treated as a sale, the company receives cash but also incurs a loss (the factoring fee)
and retains a potential liability (the recourse obligation, though not explicitly quantified
here, the fee is the primary asset reducer). The company receives $100,000 - $5,000
(fee) - $10,000 (reserve) = $85,000 in cash. It also establishes a receivable for the
reserve of $10,000. The net effect is: Cash (+$85,000) + Due from Factor (+$10,000) -
Accounts Receivable (-$100,000) = -$5,000. The $5,000 loss (the fee) reduces equity.
Option A is incorrect because it ignores the reduction in the receivables balance.
Option B is incorrect because it ignores the cash received and the reserve. Option D is
incorrect because it ignores the cash and reserve received.*
Q6: A company has a current ratio of 2.5 and a quick ratio of 1.0. Which of the
following transactions would increase the quick ratio?
A) Purchasing inventory on account.
B) Collecting accounts receivable.
C) Paying off accounts payable with cash.
D) Selling inventory at a profit.
Rationale: The correct answer is B. The quick ratio (acid-test ratio) is (Cash + Marketable
Securities + Accounts Receivable) / Current Liabilities. Collecting accounts receivable
increases cash and decreases accounts receivable by the same amount. The numerator
(quick assets) remains unchanged, but the composition shifts. Since cash and receivables
are both included, the numerator stays the same, but if the collection is from a receivable
that was previously sold or factored, it could change. However, under standard
circumstances, collecting A/R is a zero-sum event for quick assets. Wait, the question asks
which would INCREASE the quick ratio. Paying off accounts payable with cash (Option C)
decreases both cash (numerator) and accounts payable (denominator) by the same
amount. If the quick ratio is less than 1, paying off payables increases the ratio. If it is
greater than 1, it decreases the ratio. Since the quick ratio is 1.0, paying off payables with
cash would keep it at 1.0 (1.0/1.0). Selling inventory (Option D) increases
cash/receivables and decreases inventory, increasing the numerator and thus the quick
ratio. Option D is the best answer. Option A (purchasing inventory on account) increases
current liabilities without affecting quick assets, decreasing the quick ratio. Option B
(collecting A/R) does not change the numerator. Option C does not change the ratio if it
is exactly 1.0. Option D increases the numerator by the profit margin, increasing the
ratio. Therefore, D is correct. The search result did not provide the exact text for Q6, so
the rationale is derived from accounting principles.
Q7: Which of the following costs should be expensed in the period incurred rather
than capitalized as part of the cost of a new machine?
A) Installation costs.
B) Training costs for employees to operate the new machine.
