ACCT 305 EXAM 3 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. Delta Corporation sells two distinct products for a bundled transaction price of $120,000. Their standalone
selling prices are $90,000 and $60,000. Using relative standalone selling prices, how much of the transaction price
is allocated to the first product?
A. $48,000
B. $90,000
C. $60,000
D. $72,000
Correct Answer: D. $72,000
Explanation: The allocation is based on relative standalone selling prices. The first product receives $120,000 x
$90,000 / ($90,000 + $60,000) = $72,000.
2. Evergreen Corporation values a specialized asset primarily using its own assumptions because relevant market
inputs are not observable. Which hierarchy level is most likely?
A. Level 3
B. The asset cannot be measured at fair value
C. Level 2
D. Level 1
Correct Answer: A. Level 3
Explanation: Level 3 inputs are significant unobservable inputs reflecting assumptions market participants would use
when observable market data are unavailable.
3. Ion Corporation has cumulative preferred stock but declares no preferred dividend this year. When computing
basic EPS, how should the current-year cumulative preferred dividend requirement be treated?
A. Ignore it because no dividend was declared
B. Deduct the current-year preferred dividend requirement from net income available to common shareholders
C. Add it to net income because the dividend was not paid
D. Deduct all preferred dividends in arrears from prior years from current-year net income
Correct Answer: B. Deduct the current-year preferred dividend requirement from net income available to common
shareholders
Explanation: For cumulative preferred stock, the current-year dividend requirement is deducted in computing income
available to common shareholders whether or not it is declared. Prior-year arrears are not deducted again from
current-year income.
, 4. Redwood Corporation is plaintiff in litigation and management believes a significant recovery is probable.
Before realization, how should the expected gain generally be treated?
A. Accrue the gain because probability alone is sufficient
B. Recognize the gain in other comprehensive income
C. Offset the expected gain against unrelated loss contingencies
D. Do not recognize the gain in income; disclose only when appropriate and avoid misleading recognition
Correct Answer: D. Do not recognize the gain in income; disclose only when appropriate and avoid misleading
recognition
Explanation: Gain contingencies are treated more conservatively than loss contingencies. They are generally not
recognized in income before realization, although disclosure may be appropriate when it can be made without implying
recognition is assured.
5. Aster Corporation pays $220,000 of cash dividends to common shareholders. Under U.S. GAAP, how is the
payment generally classified?
A. Operating outflow
B. Noncash financing activity
C. Financing outflow
D. Investing outflow
Correct Answer: C. Financing outflow
Explanation: Under U.S. GAAP, cash dividends paid are generally financing cash outflows because they are
distributions to owners.
6. Employees of Pioneer Corporation receive restricted stock units that vest only if they complete a specified
service period. What is the basic accounting objective during the service period?
A. Record the award as a dividend to employees
B. Recognize compensation cost over the requisite service period based on the applicable award measurement
C. Wait to recognize all compensation cost until shares are delivered
D. Charge the award directly to retained earnings at grant date
Correct Answer: B. Recognize compensation cost over the requisite service period based on the applicable award
measurement
Explanation: A service condition generally leads to recognition of compensation cost over the period employees
provide the service required to earn the award, using the measurement basis required for the award's classification.
7. Unity Corporation enters material transactions with a company controlled by a close family member of an
executive. What is a central disclosure objective?
A. Hide the relationship if prices approximate market rates
B. Report them only in the statement of cash flows
C. Classify all such transactions as discontinued operations
D. Describe the related-party relationship and material transaction information needed to understand its effects
Correct Answer: D. Describe the related-party relationship and material transaction information needed to
understand its effects
Explanation: Related-party disclosures help users understand transactions that may not have been conducted on an
arm's-length basis, including the nature of relationships, transactions, and relevant balances or terms.
AND EXPLANATIONS
| American Public University
1. Delta Corporation sells two distinct products for a bundled transaction price of $120,000. Their standalone
selling prices are $90,000 and $60,000. Using relative standalone selling prices, how much of the transaction price
is allocated to the first product?
A. $48,000
B. $90,000
C. $60,000
D. $72,000
Correct Answer: D. $72,000
Explanation: The allocation is based on relative standalone selling prices. The first product receives $120,000 x
$90,000 / ($90,000 + $60,000) = $72,000.
2. Evergreen Corporation values a specialized asset primarily using its own assumptions because relevant market
inputs are not observable. Which hierarchy level is most likely?
A. Level 3
B. The asset cannot be measured at fair value
C. Level 2
D. Level 1
Correct Answer: A. Level 3
Explanation: Level 3 inputs are significant unobservable inputs reflecting assumptions market participants would use
when observable market data are unavailable.
3. Ion Corporation has cumulative preferred stock but declares no preferred dividend this year. When computing
basic EPS, how should the current-year cumulative preferred dividend requirement be treated?
A. Ignore it because no dividend was declared
B. Deduct the current-year preferred dividend requirement from net income available to common shareholders
C. Add it to net income because the dividend was not paid
D. Deduct all preferred dividends in arrears from prior years from current-year net income
Correct Answer: B. Deduct the current-year preferred dividend requirement from net income available to common
shareholders
Explanation: For cumulative preferred stock, the current-year dividend requirement is deducted in computing income
available to common shareholders whether or not it is declared. Prior-year arrears are not deducted again from
current-year income.
, 4. Redwood Corporation is plaintiff in litigation and management believes a significant recovery is probable.
Before realization, how should the expected gain generally be treated?
A. Accrue the gain because probability alone is sufficient
B. Recognize the gain in other comprehensive income
C. Offset the expected gain against unrelated loss contingencies
D. Do not recognize the gain in income; disclose only when appropriate and avoid misleading recognition
Correct Answer: D. Do not recognize the gain in income; disclose only when appropriate and avoid misleading
recognition
Explanation: Gain contingencies are treated more conservatively than loss contingencies. They are generally not
recognized in income before realization, although disclosure may be appropriate when it can be made without implying
recognition is assured.
5. Aster Corporation pays $220,000 of cash dividends to common shareholders. Under U.S. GAAP, how is the
payment generally classified?
A. Operating outflow
B. Noncash financing activity
C. Financing outflow
D. Investing outflow
Correct Answer: C. Financing outflow
Explanation: Under U.S. GAAP, cash dividends paid are generally financing cash outflows because they are
distributions to owners.
6. Employees of Pioneer Corporation receive restricted stock units that vest only if they complete a specified
service period. What is the basic accounting objective during the service period?
A. Record the award as a dividend to employees
B. Recognize compensation cost over the requisite service period based on the applicable award measurement
C. Wait to recognize all compensation cost until shares are delivered
D. Charge the award directly to retained earnings at grant date
Correct Answer: B. Recognize compensation cost over the requisite service period based on the applicable award
measurement
Explanation: A service condition generally leads to recognition of compensation cost over the period employees
provide the service required to earn the award, using the measurement basis required for the award's classification.
7. Unity Corporation enters material transactions with a company controlled by a close family member of an
executive. What is a central disclosure objective?
A. Hide the relationship if prices approximate market rates
B. Report them only in the statement of cash flows
C. Classify all such transactions as discontinued operations
D. Describe the related-party relationship and material transaction information needed to understand its effects
Correct Answer: D. Describe the related-party relationship and material transaction information needed to
understand its effects
Explanation: Related-party disclosures help users understand transactions that may not have been conducted on an
arm's-length basis, including the nature of relationships, transactions, and relevant balances or terms.
