ACCT 305 EXAM 2 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. Delta Corporation values a bond using observable quoted prices for similar securities and observable
interest-rate curves. Which hierarchy level most likely applies?
A. Level 2
B. Level 1 because all observable inputs are Level 1
C. Level 3 because the instrument is a bond
D. No hierarchy level because valuation models are prohibited
Correct Answer: A. Level 2
Explanation: Level 2 inputs are observable inputs other than Level 1 quoted prices, such as quoted prices for similar
items and observable market data like yield curves.
2. Falcon Corporation has total liabilities of $3,000,000 and total stockholders' equity of $2,000,000. What is the
debt-to-equity ratio?
A. 2.50:1
B. 0.50:1
C. 0.67:1
D. 1.50:1
Correct Answer: D. 1.50:1
Explanation: Debt-to-equity ratio = total liabilities / total equity = $3,000,000 / $2,000,000 = 1.50:1.
3. Evergreen Corporation repurchases its own common shares for $120,000 and accounts for treasury stock using
the cost method. What is the immediate effect on total stockholders' equity?
A. It increases by $120,000
B. It decreases by $120,000
C. It decreases only by the shares' par value
D. It is unchanged because treasury stock is an asset
Correct Answer: B. It decreases by $120,000
Explanation: Treasury stock is a contra-equity account, not an asset. Under the cost method, the repurchase is recorded
at cost and reduces total stockholders' equity by the amount paid.
4. At the beginning of the year, Beacon Corporation has bonds with a carrying amount of $900,000. The effective
annual interest rate is 6%. Using the effective-interest method, what interest expense should be recognized for the
year before considering any midyear transactions?
A. $63,000
B. $60,000
C. $54,000
D. $45,000
Correct Answer: C. $54,000
Explanation: Under the effective-interest method, interest expense equals the beginning carrying amount multiplied by
the effective market rate: $900,000 x 6% = $54,000.
, 5. Lumen Corporation classifies a debt security as trading. Where are unrealized fair-value gains and losses
generally reported?
A. In other comprehensive income only
B. In current net income
C. Directly in retained earnings
D. They are not recognized until sale
Correct Answer: B. In current net income
Explanation: Trading debt securities are measured at fair value, with unrealized gains and losses generally recognized
in current earnings.
6. Harbor Corporation has 180,000 common shares outstanding on January 1 and issues 60,000 additional shares
on April 1. No other share changes occur. What is the weighted-average number of common shares for the year?
A. 240,000
B. 220,000
C. 225,000
D. 210,000
Correct Answer: C. 225,000
Explanation: Shares are weighted for the fraction of the year they are outstanding. The new shares are outstanding for 9
months, so weighted-average shares are 180,000 + 60,000 x 9/12 = 225,000.
7. Willow Corporation revises its estimate of expected credit losses because new customer information becomes
available. How should the change be accounted for?
A. As other comprehensive income because estimates are uncertain
B. As an adjustment to beginning retained earnings only
C. Retrospectively by restating all prior periods
D. Prospectively in the period of change and future periods if affected
Correct Answer: D. Prospectively in the period of change and future periods if affected
Explanation: Changes in accounting estimates arise from new information or experience and are accounted for
prospectively. Prior financial statements are not restated because the earlier estimate was not an error based on
information then available.
8. Redwood Corporation issues a noninterest-bearing note with a maturity value of $500,000 in exchange for an
asset whose cash price indicates a present value of $430,000. What amount represents the initial discount on the
note?
A. $430,000
B. $70,000
C. $500,000
D. $465,000
Correct Answer: B. $70,000
Explanation: The discount is the difference between the note's maturity value and its present value at issuance:
$500,000 - $430,000 = $70,000. The discount is amortized to interest expense over the note term.
AND EXPLANATIONS
| American Public University
1. Delta Corporation values a bond using observable quoted prices for similar securities and observable
interest-rate curves. Which hierarchy level most likely applies?
A. Level 2
B. Level 1 because all observable inputs are Level 1
C. Level 3 because the instrument is a bond
D. No hierarchy level because valuation models are prohibited
Correct Answer: A. Level 2
Explanation: Level 2 inputs are observable inputs other than Level 1 quoted prices, such as quoted prices for similar
items and observable market data like yield curves.
2. Falcon Corporation has total liabilities of $3,000,000 and total stockholders' equity of $2,000,000. What is the
debt-to-equity ratio?
A. 2.50:1
B. 0.50:1
C. 0.67:1
D. 1.50:1
Correct Answer: D. 1.50:1
Explanation: Debt-to-equity ratio = total liabilities / total equity = $3,000,000 / $2,000,000 = 1.50:1.
3. Evergreen Corporation repurchases its own common shares for $120,000 and accounts for treasury stock using
the cost method. What is the immediate effect on total stockholders' equity?
A. It increases by $120,000
B. It decreases by $120,000
C. It decreases only by the shares' par value
D. It is unchanged because treasury stock is an asset
Correct Answer: B. It decreases by $120,000
Explanation: Treasury stock is a contra-equity account, not an asset. Under the cost method, the repurchase is recorded
at cost and reduces total stockholders' equity by the amount paid.
4. At the beginning of the year, Beacon Corporation has bonds with a carrying amount of $900,000. The effective
annual interest rate is 6%. Using the effective-interest method, what interest expense should be recognized for the
year before considering any midyear transactions?
A. $63,000
B. $60,000
C. $54,000
D. $45,000
Correct Answer: C. $54,000
Explanation: Under the effective-interest method, interest expense equals the beginning carrying amount multiplied by
the effective market rate: $900,000 x 6% = $54,000.
, 5. Lumen Corporation classifies a debt security as trading. Where are unrealized fair-value gains and losses
generally reported?
A. In other comprehensive income only
B. In current net income
C. Directly in retained earnings
D. They are not recognized until sale
Correct Answer: B. In current net income
Explanation: Trading debt securities are measured at fair value, with unrealized gains and losses generally recognized
in current earnings.
6. Harbor Corporation has 180,000 common shares outstanding on January 1 and issues 60,000 additional shares
on April 1. No other share changes occur. What is the weighted-average number of common shares for the year?
A. 240,000
B. 220,000
C. 225,000
D. 210,000
Correct Answer: C. 225,000
Explanation: Shares are weighted for the fraction of the year they are outstanding. The new shares are outstanding for 9
months, so weighted-average shares are 180,000 + 60,000 x 9/12 = 225,000.
7. Willow Corporation revises its estimate of expected credit losses because new customer information becomes
available. How should the change be accounted for?
A. As other comprehensive income because estimates are uncertain
B. As an adjustment to beginning retained earnings only
C. Retrospectively by restating all prior periods
D. Prospectively in the period of change and future periods if affected
Correct Answer: D. Prospectively in the period of change and future periods if affected
Explanation: Changes in accounting estimates arise from new information or experience and are accounted for
prospectively. Prior financial statements are not restated because the earlier estimate was not an error based on
information then available.
8. Redwood Corporation issues a noninterest-bearing note with a maturity value of $500,000 in exchange for an
asset whose cash price indicates a present value of $430,000. What amount represents the initial discount on the
note?
A. $430,000
B. $70,000
C. $500,000
D. $465,000
Correct Answer: B. $70,000
Explanation: The discount is the difference between the note's maturity value and its present value at issuance:
$500,000 - $430,000 = $70,000. The discount is amortized to interest expense over the note term.
