ACCT 304 MIDTERM EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Northstar Textiles has a note payable with principal approximating its carrying amount of $1,620,000
and a 8.5% annual interest rate. Four months of interest have accrued since the last payment. What
year-end interest payable should be recognized?
A. $91,800
B. $45,900
C. $137,700
D. $68,850
Correct Answer: B. $45,900
Explanation: Accrued interest is principal x annual rate x time: $1,620,000 x 8.5% x 4/12 = $45,900.
2. Which fact most strongly supports use of the equity method by Triton Equipment for an investee even
if ownership is below a simple majority?
A. The investment is publicly traded
B. The investor plans to hold the shares for more than one year
C. Representation on the investee's board and participation in policy decisions
D. The investee pays cash dividends
Correct Answer: C. Representation on the investee's board and participation in policy decisions
Explanation: The equity method is based on significant influence, not just holding period or marketability.
Board representation and participation in policy-making are strong indicators of significant influence.
3. Granite Labs has a $1,800,000 long-term note payable. Principal of $320,000 is contractually due
within the next 12 months and no refinancing arrangement changes that obligation. How should the
$320,000 amount generally be presented?
A. As a current liability
B. As an operating expense
C. As a noncurrent liability because the original note was long-term
D. As a reduction of retained earnings
Correct Answer: A. As a current liability
Explanation: The portion of long-term debt due within the operating cycle or one year is generally
classified as current unless specific refinancing criteria for noncurrent classification are met.
, 4. The board of Pioneer Logistics declares a cash dividend of $1.20 per share on 280,000 shares
outstanding. What liability is recognized on the declaration date?
A. $0 until payment date
B. $280,000
C. $336,000
D. $1
Correct Answer: C. $336,000
Explanation: A cash dividend becomes a liability when declared by the board, assuming legal requirements
are met. Dividend payable = 280,000 x $1.20 = $336,000.
5. Northstar Textiles sells equipment with a standard assurance warranty and separately sells an optional
two-year extended service warranty. Which statement is most appropriate?
A. The optional service warranty is a separate performance obligation; the assurance warranty is generally
accounted for under warranty guidance
B. Both warranties are always combined into one performance obligation
C. The assurance warranty is always a separate revenue performance obligation
D. Both warranties are ignored until claims occur
Correct Answer: A. The optional service warranty is a separate performance obligation; the assurance
warranty is generally accounted for under warranty guidance
Explanation: A separately priced service-type warranty provides an additional service and is a performance
obligation. A warranty that only assures the product complies with agreed specifications is generally
accounted for under warranty provisions rather than as a separate ASC 606 performance obligation.
6. Orchid Brands has convertible bonds with face value $1,275,000 and carrying amount $1,230,000. The
bonds are converted into common shares according to their original terms, and no inducement is paid.
Under the book-value method commonly applied under U.S. GAAP, which amount is generally used as
the total amount reclassified from the debt accounts to equity?
A. $1,275,000
B. $1,230,000
C. $1,325,000
D. $45,000
Correct Answer: B. $1,230,000
Explanation: Under the book-value approach, the carrying amount of the converted debt is reclassified to
equity, with no gain or loss recognized solely from the conversion. The exact split within equity depends on
par/stated value and APIC details.
ANSWERS AND EXPLANATIONS
| American Public University
1. Northstar Textiles has a note payable with principal approximating its carrying amount of $1,620,000
and a 8.5% annual interest rate. Four months of interest have accrued since the last payment. What
year-end interest payable should be recognized?
A. $91,800
B. $45,900
C. $137,700
D. $68,850
Correct Answer: B. $45,900
Explanation: Accrued interest is principal x annual rate x time: $1,620,000 x 8.5% x 4/12 = $45,900.
2. Which fact most strongly supports use of the equity method by Triton Equipment for an investee even
if ownership is below a simple majority?
A. The investment is publicly traded
B. The investor plans to hold the shares for more than one year
C. Representation on the investee's board and participation in policy decisions
D. The investee pays cash dividends
Correct Answer: C. Representation on the investee's board and participation in policy decisions
Explanation: The equity method is based on significant influence, not just holding period or marketability.
Board representation and participation in policy-making are strong indicators of significant influence.
3. Granite Labs has a $1,800,000 long-term note payable. Principal of $320,000 is contractually due
within the next 12 months and no refinancing arrangement changes that obligation. How should the
$320,000 amount generally be presented?
A. As a current liability
B. As an operating expense
C. As a noncurrent liability because the original note was long-term
D. As a reduction of retained earnings
Correct Answer: A. As a current liability
Explanation: The portion of long-term debt due within the operating cycle or one year is generally
classified as current unless specific refinancing criteria for noncurrent classification are met.
, 4. The board of Pioneer Logistics declares a cash dividend of $1.20 per share on 280,000 shares
outstanding. What liability is recognized on the declaration date?
A. $0 until payment date
B. $280,000
C. $336,000
D. $1
Correct Answer: C. $336,000
Explanation: A cash dividend becomes a liability when declared by the board, assuming legal requirements
are met. Dividend payable = 280,000 x $1.20 = $336,000.
5. Northstar Textiles sells equipment with a standard assurance warranty and separately sells an optional
two-year extended service warranty. Which statement is most appropriate?
A. The optional service warranty is a separate performance obligation; the assurance warranty is generally
accounted for under warranty guidance
B. Both warranties are always combined into one performance obligation
C. The assurance warranty is always a separate revenue performance obligation
D. Both warranties are ignored until claims occur
Correct Answer: A. The optional service warranty is a separate performance obligation; the assurance
warranty is generally accounted for under warranty guidance
Explanation: A separately priced service-type warranty provides an additional service and is a performance
obligation. A warranty that only assures the product complies with agreed specifications is generally
accounted for under warranty provisions rather than as a separate ASC 606 performance obligation.
6. Orchid Brands has convertible bonds with face value $1,275,000 and carrying amount $1,230,000. The
bonds are converted into common shares according to their original terms, and no inducement is paid.
Under the book-value method commonly applied under U.S. GAAP, which amount is generally used as
the total amount reclassified from the debt accounts to equity?
A. $1,275,000
B. $1,230,000
C. $1,325,000
D. $45,000
Correct Answer: B. $1,230,000
Explanation: Under the book-value approach, the carrying amount of the converted debt is reclassified to
equity, with no gain or loss recognized solely from the conversion. The exact split within equity depends on
par/stated value and APIC details.
