ACCT 304 EXAM 2 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. Lumen Services purchases debt securities that management has the positive intent and ability to hold to
maturity. Which subsequent measurement basis is generally appropriate under U.S. GAAP?
A. Fair value with all changes in net income
B. Fair value with all changes in retained earnings
C. Amortized cost, subject to applicable credit-loss guidance
D. Historical cost without interest accrual
Correct Answer: C. Amortized cost, subject to applicable credit-loss guidance
Explanation: Held-to-maturity debt securities are generally reported at amortized cost, subject to credit-loss
guidance. Trading and available-for-sale debt securities use fair value with different locations for unrealized
changes.
2. Juniper Media issues 50,000 shares of $2.00 par common stock for $24.00 per share. What amount is
credited to additional paid-in capital?
A. $100,000
B. $1,100,000
C. $1,200,000
D. $1,300,000
Correct Answer: B. $1,100,000
Explanation: Common Stock is credited for par value, 50,000 x $2.00 = $100,000. The excess issue
proceeds, $1,100,000, is credited to APIC.
3. Northstar Textiles reports net income of $1,800,000 and cumulative preferred dividends of $120,000.
Weighted-average common shares outstanding are 600,000. What is basic EPS?
A. $2.80
B. $3.00
C. $0.20
D. $3.20
Correct Answer: A. $2.80
Explanation: Basic EPS numerator for common shareholders is net income less applicable preferred
dividends: ($1,800,000 - $120,000) / 600,000 = $2.80.
, 4. Keystone Tools reacquires 18,500 of its own common shares for $32.00 per share and uses the cost
method for treasury stock. What amount is debited to Treasury Stock?
A. $18,500
B. $296,000
C. $32
D. $592,000
Correct Answer: D. $592,000
Explanation: Under the cost method, treasury stock is recorded at the amount paid to reacquire the shares:
18,500 x $32.00 = $592,000.
5. Metro Devices holds trading debt securities that cost $660,000 and have a year-end fair value of
$717,000. Ignoring interest and credit losses, where should the unrealized $57,000 holding gain be
reported?
A. In other comprehensive income only
B. Directly in retained earnings without passing through income
C. In current-period earnings
D. It is not recognized until sale
Correct Answer: C. In current-period earnings
Explanation: Trading debt securities are measured at fair value, with unrealized holding gains and losses
included in earnings.
6. Orchid Brands had 500,000 common shares outstanding on January 1 and issued 125,000 additional
shares on the first day of month 5. No other share changes occurred. What weighted-average common
shares should be used for basic EPS?
A. 500,000
B. 552,083
C. 625,000
D. 583,333
Correct Answer: D. 583,333
Explanation: The new shares are weighted for 8 of 12 months. Weighted-average shares = 500,000 +
125,000 x 8/12 = 583,333.
7. Northstar Textiles owns an available-for-sale debt security with amortized cost $844,000 and fair value
$786,000. Assume no credit loss is present. Where is the unrealized holding loss of $58,000 generally
reported?
A. In current-period revenue
B. In other comprehensive income
C. As a liability
D. Not recognized anywhere until sale
Correct Answer: B. In other comprehensive income
Explanation: For available-for-sale debt securities, noncredit unrealized holding gains and losses are
generally reported in OCI until realized, while the security is presented at fair value.
AND EXPLANATIONS
| American Public University
1. Lumen Services purchases debt securities that management has the positive intent and ability to hold to
maturity. Which subsequent measurement basis is generally appropriate under U.S. GAAP?
A. Fair value with all changes in net income
B. Fair value with all changes in retained earnings
C. Amortized cost, subject to applicable credit-loss guidance
D. Historical cost without interest accrual
Correct Answer: C. Amortized cost, subject to applicable credit-loss guidance
Explanation: Held-to-maturity debt securities are generally reported at amortized cost, subject to credit-loss
guidance. Trading and available-for-sale debt securities use fair value with different locations for unrealized
changes.
2. Juniper Media issues 50,000 shares of $2.00 par common stock for $24.00 per share. What amount is
credited to additional paid-in capital?
A. $100,000
B. $1,100,000
C. $1,200,000
D. $1,300,000
Correct Answer: B. $1,100,000
Explanation: Common Stock is credited for par value, 50,000 x $2.00 = $100,000. The excess issue
proceeds, $1,100,000, is credited to APIC.
3. Northstar Textiles reports net income of $1,800,000 and cumulative preferred dividends of $120,000.
Weighted-average common shares outstanding are 600,000. What is basic EPS?
A. $2.80
B. $3.00
C. $0.20
D. $3.20
Correct Answer: A. $2.80
Explanation: Basic EPS numerator for common shareholders is net income less applicable preferred
dividends: ($1,800,000 - $120,000) / 600,000 = $2.80.
, 4. Keystone Tools reacquires 18,500 of its own common shares for $32.00 per share and uses the cost
method for treasury stock. What amount is debited to Treasury Stock?
A. $18,500
B. $296,000
C. $32
D. $592,000
Correct Answer: D. $592,000
Explanation: Under the cost method, treasury stock is recorded at the amount paid to reacquire the shares:
18,500 x $32.00 = $592,000.
5. Metro Devices holds trading debt securities that cost $660,000 and have a year-end fair value of
$717,000. Ignoring interest and credit losses, where should the unrealized $57,000 holding gain be
reported?
A. In other comprehensive income only
B. Directly in retained earnings without passing through income
C. In current-period earnings
D. It is not recognized until sale
Correct Answer: C. In current-period earnings
Explanation: Trading debt securities are measured at fair value, with unrealized holding gains and losses
included in earnings.
6. Orchid Brands had 500,000 common shares outstanding on January 1 and issued 125,000 additional
shares on the first day of month 5. No other share changes occurred. What weighted-average common
shares should be used for basic EPS?
A. 500,000
B. 552,083
C. 625,000
D. 583,333
Correct Answer: D. 583,333
Explanation: The new shares are weighted for 8 of 12 months. Weighted-average shares = 500,000 +
125,000 x 8/12 = 583,333.
7. Northstar Textiles owns an available-for-sale debt security with amortized cost $844,000 and fair value
$786,000. Assume no credit loss is present. Where is the unrealized holding loss of $58,000 generally
reported?
A. In current-period revenue
B. In other comprehensive income
C. As a liability
D. Not recognized anywhere until sale
Correct Answer: B. In other comprehensive income
Explanation: For available-for-sale debt securities, noncredit unrealized holding gains and losses are
generally reported in OCI until realized, while the security is presented at fair value.
