ACCT 305 EXAM 1 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. Evergreen Corporation reports current assets of $1,800,000 and current liabilities of $900,000. What is its
current ratio?
A. 3.00:1
B. 0.50:1
C. 1.00:1
D. 2.00:1
Correct Answer: D. 2.00:1
Explanation: Current ratio = current assets / current liabilities = $1,800,000 / $900,000 = 2.00:1.
2. Vantage Corporation voluntarily changes from one acceptable inventory-costing principle to another and the
change is preferable. Unless impracticable, how is the change generally reported?
A. Prospectively beginning in the year of change only
B. Only in the notes, with no adjustment to reported amounts
C. As a current-period extraordinary item
D. Retrospectively by adjusting prior-period financial statements and opening equity as needed
Correct Answer: D. Retrospectively by adjusting prior-period financial statements and opening equity as needed
Explanation: A voluntary change in accounting principle is generally applied retrospectively unless retrospective
application is impracticable or specific transition guidance requires another method. Prior periods are adjusted as if the
new principle had always been used.
3. Delta Corporation issues 50,000 shares of $2 par common stock for $14 per share. How much additional paid-in
capital is credited?
A. $600,000
B. $700,000
C. $100,000
D. $300,000
Correct Answer: A. $600,000
Explanation: Common Stock is credited for par value, 50,000 x $2 = $100,000. The excess of issue price over par is
credited to additional paid-in capital: 50,000 x ($14 - $2) = $600,000.
4. At year-end, Pioneer Corporation's counsel concludes that a pending lawsuit loss is probable and can be
reasonably estimated at $250,000. What is the appropriate accounting treatment?
A. Disclose the matter only; no accrual is permitted before settlement
B. Accrue a $250,000 loss and liability and provide appropriate disclosure
C. Record the amount in other comprehensive loss
D. Wait until cash is paid because litigation losses are not recognized before payment
Correct Answer: B. Accrue a $250,000 loss and liability and provide appropriate disclosure
Explanation: A loss contingency is accrued when the loss is probable and reasonably estimable. Disclosure is also
typically provided when needed to keep the financial statements from being misleading.
, 5. Keystone Corporation has the positive intent and ability to hold a debt security to maturity. If the security
qualifies for held-to-maturity classification, how is it generally measured after acquisition?
A. At historical cost without any premium or discount amortization
B. At fair value with all changes in OCI
C. At fair value with all changes in net income
D. At amortized cost, subject to applicable credit-loss guidance
Correct Answer: D. At amortized cost, subject to applicable credit-loss guidance
Explanation: Held-to-maturity debt securities are generally measured at amortized cost because the entity intends and is
able to hold them to maturity, subject to the applicable expected-credit-loss requirements.
6. Granite Corporation reports net income of $800,000, cumulative preferred dividends of $40,000, and
weighted-average common shares of 200,000. What is basic earnings per share?
A. $4.00
B. $3.80
C. $4.20
D. $3.45
Correct Answer: B. $3.80
Explanation: Basic EPS allocates income available to common shareholders over weighted-average common shares.
($800,000 - $40,000) / 200,000 = $3.80.
7. Triton Corporation disposes of a component that qualifies as a discontinued operation. Where is the
discontinued-operation result generally presented in the income statement?
A. Separately from continuing operations, net of applicable income tax effects
B. Directly in retained earnings with no income-statement presentation
C. Within revenue as a reduction of sales
D. Only in other comprehensive income
Correct Answer: A. Separately from continuing operations, net of applicable income tax effects
Explanation: A qualifying discontinued operation is presented separately from continuing operations, generally net of
related income tax effects, to help users distinguish continuing performance from the disposed component.
8. Nimbus Corporation grants equity-classified employee awards with a grant-date fair value of $360,000 that vest
after three years of service. Assuming straight-line attribution and no other complications, how much
compensation cost is recognized each year?
A. $360,000
B. $120,000
C. $90,000
D. $180,000
Correct Answer: B. $120,000
Explanation: Equity-classified employee awards are generally measured at grant-date fair value and recognized over
the requisite service period. With straight-line attribution over three years, annual compensation cost is $360, =
$120,000.
AND EXPLANATIONS
| American Public University
1. Evergreen Corporation reports current assets of $1,800,000 and current liabilities of $900,000. What is its
current ratio?
A. 3.00:1
B. 0.50:1
C. 1.00:1
D. 2.00:1
Correct Answer: D. 2.00:1
Explanation: Current ratio = current assets / current liabilities = $1,800,000 / $900,000 = 2.00:1.
2. Vantage Corporation voluntarily changes from one acceptable inventory-costing principle to another and the
change is preferable. Unless impracticable, how is the change generally reported?
A. Prospectively beginning in the year of change only
B. Only in the notes, with no adjustment to reported amounts
C. As a current-period extraordinary item
D. Retrospectively by adjusting prior-period financial statements and opening equity as needed
Correct Answer: D. Retrospectively by adjusting prior-period financial statements and opening equity as needed
Explanation: A voluntary change in accounting principle is generally applied retrospectively unless retrospective
application is impracticable or specific transition guidance requires another method. Prior periods are adjusted as if the
new principle had always been used.
3. Delta Corporation issues 50,000 shares of $2 par common stock for $14 per share. How much additional paid-in
capital is credited?
A. $600,000
B. $700,000
C. $100,000
D. $300,000
Correct Answer: A. $600,000
Explanation: Common Stock is credited for par value, 50,000 x $2 = $100,000. The excess of issue price over par is
credited to additional paid-in capital: 50,000 x ($14 - $2) = $600,000.
4. At year-end, Pioneer Corporation's counsel concludes that a pending lawsuit loss is probable and can be
reasonably estimated at $250,000. What is the appropriate accounting treatment?
A. Disclose the matter only; no accrual is permitted before settlement
B. Accrue a $250,000 loss and liability and provide appropriate disclosure
C. Record the amount in other comprehensive loss
D. Wait until cash is paid because litigation losses are not recognized before payment
Correct Answer: B. Accrue a $250,000 loss and liability and provide appropriate disclosure
Explanation: A loss contingency is accrued when the loss is probable and reasonably estimable. Disclosure is also
typically provided when needed to keep the financial statements from being misleading.
, 5. Keystone Corporation has the positive intent and ability to hold a debt security to maturity. If the security
qualifies for held-to-maturity classification, how is it generally measured after acquisition?
A. At historical cost without any premium or discount amortization
B. At fair value with all changes in OCI
C. At fair value with all changes in net income
D. At amortized cost, subject to applicable credit-loss guidance
Correct Answer: D. At amortized cost, subject to applicable credit-loss guidance
Explanation: Held-to-maturity debt securities are generally measured at amortized cost because the entity intends and is
able to hold them to maturity, subject to the applicable expected-credit-loss requirements.
6. Granite Corporation reports net income of $800,000, cumulative preferred dividends of $40,000, and
weighted-average common shares of 200,000. What is basic earnings per share?
A. $4.00
B. $3.80
C. $4.20
D. $3.45
Correct Answer: B. $3.80
Explanation: Basic EPS allocates income available to common shareholders over weighted-average common shares.
($800,000 - $40,000) / 200,000 = $3.80.
7. Triton Corporation disposes of a component that qualifies as a discontinued operation. Where is the
discontinued-operation result generally presented in the income statement?
A. Separately from continuing operations, net of applicable income tax effects
B. Directly in retained earnings with no income-statement presentation
C. Within revenue as a reduction of sales
D. Only in other comprehensive income
Correct Answer: A. Separately from continuing operations, net of applicable income tax effects
Explanation: A qualifying discontinued operation is presented separately from continuing operations, generally net of
related income tax effects, to help users distinguish continuing performance from the disposed component.
8. Nimbus Corporation grants equity-classified employee awards with a grant-date fair value of $360,000 that vest
after three years of service. Assuming straight-line attribution and no other complications, how much
compensation cost is recognized each year?
A. $360,000
B. $120,000
C. $90,000
D. $180,000
Correct Answer: B. $120,000
Explanation: Equity-classified employee awards are generally measured at grant-date fair value and recognized over
the requisite service period. With straight-line attribution over three years, annual compensation cost is $360, =
$120,000.
