ACCT 304 EXAM 1 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. Delta Medical issues $1,000,000 face-value bonds with a 6.0% stated rate, interest paid semiannually,
when the market yield is 8.0%. The bonds mature in 5 years. Approximately what amount of cash should
the issuer receive at issuance?
A. $1,060,000
B. $918,891
C. $920,000
D. $1,000,000
Correct Answer: B. $918,891
Explanation: The issue price equals the present value of the coupon payments plus the present value of
principal discounted at the market yield per period. Because the market rate exceeds the stated rate, the
bonds issue at a discount, approximately $918,891.
2. Alder Systems made taxable cash sales of $720,000 during the month. The jurisdiction imposes a 6.0%
sales tax that the retailer collects from customers. Ignoring cost of goods sold, what liability should Alder
Systems recognize for sales taxes at month-end?
A. $40,755
B. $720,000
C. $763,200
D. $43,200
Correct Answer: D. $43,200
Explanation: The retailer acts as a collection agent for the taxing authority. Sales tax payable is $720,000 x
6.0% = $43,200; the tax collected is not revenue of Alder Systems.
3. Elm Ridge issued bonds at $1,130,096. Face value is $1,240,000, the stated annual rate is 8.0%, the
market annual yield is 10.0%, and interest is semiannual. Under the effective-interest method, what is the
first six-month interest expense?
A. $56,505
B. $49,600
C. $6,905
D. $62,000
Correct Answer: A. $56,505
Explanation: Effective interest expense is beginning carrying amount x market rate per period = $1,130,096
x 5.0% = $56,505. Cash interest is $49,600, so discount amortization is $6,905.
, 4. Beacon Foods sold $185,000 of gift cards and estimates expected breakage of 5.0%. During the year,
customers redeemed $125,800 of cards. If breakage is recognized in proportion to actual redemptions,
approximately how much breakage revenue should be recognized with those redemptions?
A. $59,200
B. $6,290
C. $6,621
D. $9,250
Correct Answer: C. $6,621
Explanation: Expected breakage is recognized in proportion to rights exercised. The proportional amount is
expected breakage x redemptions / expected redemptions, or approximately $9,250 x $125,800 / $175,750 =
$6,621.
5. Falcon Components issued $960,000 of five-year bonds at $1,037,865 because the 10.0% stated rate
exceeded the 8.0% market yield. Interest is semiannual. After the first interest payment, what is the bond
carrying amount under the effective-interest method?
A. $989,865
B. $1,031,379
C. $1,044,350
D. $960,000
Correct Answer: B. $1,031,379
Explanation: For premium bonds, cash interest ($48,000) exceeds effective interest expense ($41,515); the
difference, $6,485, reduces the premium. Carrying amount becomes $1,037,865 - $6,485 = $1,031,379.
6. Falcon Components buys equipment for $680,000, pays $18,000 freight, $27,000 installation, and
$12,000 employee training. What amount should be capitalized as equipment cost?
A. $725,000
B. $737,000
C. $680,000
D. $707,000
Correct Answer: A. $725,000
Explanation: Capitalized cost includes expenditures necessary to acquire and prepare the asset for its
intended use: purchase price, freight, and installation. Training is expensed. Capitalized cost = $725,000.
7. Granite Labs repurchases outstanding bonds for $1,840,000 when their net carrying amount is
$1,925,000. Ignoring accrued interest, what should be recognized on extinguishment?
A. No gain or loss
B. Interest expense of $1,840,000
C. A loss of $85,000
D. A gain of $85,000
Correct Answer: D. A gain of $85,000
Explanation: When debt is extinguished, compare the reacquisition price with the net carrying amount.
Because $1,840,000 is $85,000 below carrying amount, Granite Labs recognizes a $85,000 gain.
AND EXPLANATIONS
| American Public University
1. Delta Medical issues $1,000,000 face-value bonds with a 6.0% stated rate, interest paid semiannually,
when the market yield is 8.0%. The bonds mature in 5 years. Approximately what amount of cash should
the issuer receive at issuance?
A. $1,060,000
B. $918,891
C. $920,000
D. $1,000,000
Correct Answer: B. $918,891
Explanation: The issue price equals the present value of the coupon payments plus the present value of
principal discounted at the market yield per period. Because the market rate exceeds the stated rate, the
bonds issue at a discount, approximately $918,891.
2. Alder Systems made taxable cash sales of $720,000 during the month. The jurisdiction imposes a 6.0%
sales tax that the retailer collects from customers. Ignoring cost of goods sold, what liability should Alder
Systems recognize for sales taxes at month-end?
A. $40,755
B. $720,000
C. $763,200
D. $43,200
Correct Answer: D. $43,200
Explanation: The retailer acts as a collection agent for the taxing authority. Sales tax payable is $720,000 x
6.0% = $43,200; the tax collected is not revenue of Alder Systems.
3. Elm Ridge issued bonds at $1,130,096. Face value is $1,240,000, the stated annual rate is 8.0%, the
market annual yield is 10.0%, and interest is semiannual. Under the effective-interest method, what is the
first six-month interest expense?
A. $56,505
B. $49,600
C. $6,905
D. $62,000
Correct Answer: A. $56,505
Explanation: Effective interest expense is beginning carrying amount x market rate per period = $1,130,096
x 5.0% = $56,505. Cash interest is $49,600, so discount amortization is $6,905.
, 4. Beacon Foods sold $185,000 of gift cards and estimates expected breakage of 5.0%. During the year,
customers redeemed $125,800 of cards. If breakage is recognized in proportion to actual redemptions,
approximately how much breakage revenue should be recognized with those redemptions?
A. $59,200
B. $6,290
C. $6,621
D. $9,250
Correct Answer: C. $6,621
Explanation: Expected breakage is recognized in proportion to rights exercised. The proportional amount is
expected breakage x redemptions / expected redemptions, or approximately $9,250 x $125,800 / $175,750 =
$6,621.
5. Falcon Components issued $960,000 of five-year bonds at $1,037,865 because the 10.0% stated rate
exceeded the 8.0% market yield. Interest is semiannual. After the first interest payment, what is the bond
carrying amount under the effective-interest method?
A. $989,865
B. $1,031,379
C. $1,044,350
D. $960,000
Correct Answer: B. $1,031,379
Explanation: For premium bonds, cash interest ($48,000) exceeds effective interest expense ($41,515); the
difference, $6,485, reduces the premium. Carrying amount becomes $1,037,865 - $6,485 = $1,031,379.
6. Falcon Components buys equipment for $680,000, pays $18,000 freight, $27,000 installation, and
$12,000 employee training. What amount should be capitalized as equipment cost?
A. $725,000
B. $737,000
C. $680,000
D. $707,000
Correct Answer: A. $725,000
Explanation: Capitalized cost includes expenditures necessary to acquire and prepare the asset for its
intended use: purchase price, freight, and installation. Training is expensed. Capitalized cost = $725,000.
7. Granite Labs repurchases outstanding bonds for $1,840,000 when their net carrying amount is
$1,925,000. Ignoring accrued interest, what should be recognized on extinguishment?
A. No gain or loss
B. Interest expense of $1,840,000
C. A loss of $85,000
D. A gain of $85,000
Correct Answer: D. A gain of $85,000
Explanation: When debt is extinguished, compare the reacquisition price with the net carrying amount.
Because $1,840,000 is $85,000 below carrying amount, Granite Labs recognizes a $85,000 gain.
