ACCT 305 FINAL EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. For an operating lease under U.S. GAAP, Quartz Corporation expects a level pattern of payments over the lease
term. Which income-statement pattern is generally intended?
A. No lease expense until cash is paid
B. Lease expense equal only to the interest accretion on the liability
C. Separate interest expense and amortization expense that decline and remain level, respectively
D. A single lease expense recognized on a straight-line basis over the lease term
Correct Answer: D. A single lease expense recognized on a straight-line basis over the lease term
Explanation: Operating leases generally produce a single lease expense recognized on a straight-line basis over the
lease term, while the right-of-use asset is adjusted so the combined pattern remains level, subject to specific facts and
modifications.
2. Harbor Corporation executes a 2-for-1 common stock split. Which combination of effects is most accurate
immediately after the split, assuming no market-price changes are considered?
A. Par value per share and total stockholders' equity both remain unchanged
B. Shares outstanding increase, par value per share decreases, and total stockholders' equity is unchanged
C. Shares outstanding increase and total stockholders' equity increases by the par value of the new shares
D. Shares outstanding decrease, par value per share increases, and retained earnings decreases
Correct Answer: B. Shares outstanding increase, par value per share decreases, and total stockholders' equity is
unchanged
Explanation: A stock split changes the number of shares and proportionately changes par or stated value per share, but
it does not change total paid-in capital, retained earnings, or total stockholders' equity.
3. Orion Corporation holds a debt investment with a beginning amortized cost of $480,000 and an effective yield
of 6%. Using the effective-interest method, what interest revenue is recognized for the year before considering
cash collections?
A. $33,600
B. $80,000
C. $24,000
D. $28,800
Correct Answer: D. $28,800
Explanation: Effective-interest revenue is based on the investment's beginning amortized cost multiplied by its
effective yield: $480,000 x 6% = $28,800.
4. Available evidence indicates that it is more likely than not that a portion of Nimbus Corporation's recognized
deferred tax asset will not be realized. What accounting response is appropriate under U.S. GAAP?
A. Record a valuation allowance for the portion not expected to be realized
B. Reclassify the deferred tax asset to other comprehensive income
C. Write off the entire deferred tax asset automatically
D. Leave the deferred tax asset unchanged until the underlying tax attribute expires
Correct Answer: A. Record a valuation allowance for the portion not expected to be realized
Explanation: A deferred tax asset is reduced by a valuation allowance when, based on available evidence, realization of
some portion is not more likely than not. The allowance is reassessed each reporting period.
, 5. Xenon Corporation reports a large loss that is unusual but does not qualify as a discontinued operation. Under
current U.S. GAAP, how is the loss generally presented?
A. Directly in other comprehensive income
B. Within income from continuing operations, with separate presentation or disclosure if useful
C. As a prior-period adjustment to beginning retained earnings
D. As an extraordinary item below net income
Correct Answer: B. Within income from continuing operations, with separate presentation or disclosure if useful
Explanation: U.S. GAAP no longer presents extraordinary items as a separate income-statement category. An unusual
or infrequent item that does not qualify as discontinued operations remains in continuing operations, with appropriate
separate presentation or disclosure when material.
6. Ion Corporation reports net income of $720,000, beginning total assets of $5,000,000, and ending total assets of
$5,600,000. What is return on average assets?
A. 14.4%
B. 13.6%
C. 12.9%
D. 736.1%
Correct Answer: B. 13.6%
Explanation: Return on average assets = net income / average total assets. Average assets are ($5,000,000 +
$5,600,000) / 2 = $5,300,000, giving ROA of 13.6%.
7. What perspective does Granite Corporation use in a fair value measurement?
A. Market-participant assumptions in an orderly transaction at the measurement date
B. Only management's entity-specific planned use
C. A forced liquidation price
D. The original vendor's historical cost
Correct Answer: A. Market-participant assumptions in an orderly transaction at the measurement date
Explanation: Fair value is a market-based exit-price notion based on assumptions market participants would use in an
orderly transaction at the measurement date.
8. Why does Willow Corporation disclose significant accounting policies in the notes?
A. To explain important recognition, measurement, and presentation policies needed to understand the financial
statements
B. To disclose management compensation only
C. To replace the primary financial statements
D. To eliminate the need for estimates
Correct Answer: A. To explain important recognition, measurement, and presentation policies needed to understand
the financial statements
Explanation: Significant accounting-policy disclosures help users understand the principles and methods used to
prepare the financial statements and interpret amounts consistently.
ANSWERS AND EXPLANATIONS
| American Public University
1. For an operating lease under U.S. GAAP, Quartz Corporation expects a level pattern of payments over the lease
term. Which income-statement pattern is generally intended?
A. No lease expense until cash is paid
B. Lease expense equal only to the interest accretion on the liability
C. Separate interest expense and amortization expense that decline and remain level, respectively
D. A single lease expense recognized on a straight-line basis over the lease term
Correct Answer: D. A single lease expense recognized on a straight-line basis over the lease term
Explanation: Operating leases generally produce a single lease expense recognized on a straight-line basis over the
lease term, while the right-of-use asset is adjusted so the combined pattern remains level, subject to specific facts and
modifications.
2. Harbor Corporation executes a 2-for-1 common stock split. Which combination of effects is most accurate
immediately after the split, assuming no market-price changes are considered?
A. Par value per share and total stockholders' equity both remain unchanged
B. Shares outstanding increase, par value per share decreases, and total stockholders' equity is unchanged
C. Shares outstanding increase and total stockholders' equity increases by the par value of the new shares
D. Shares outstanding decrease, par value per share increases, and retained earnings decreases
Correct Answer: B. Shares outstanding increase, par value per share decreases, and total stockholders' equity is
unchanged
Explanation: A stock split changes the number of shares and proportionately changes par or stated value per share, but
it does not change total paid-in capital, retained earnings, or total stockholders' equity.
3. Orion Corporation holds a debt investment with a beginning amortized cost of $480,000 and an effective yield
of 6%. Using the effective-interest method, what interest revenue is recognized for the year before considering
cash collections?
A. $33,600
B. $80,000
C. $24,000
D. $28,800
Correct Answer: D. $28,800
Explanation: Effective-interest revenue is based on the investment's beginning amortized cost multiplied by its
effective yield: $480,000 x 6% = $28,800.
4. Available evidence indicates that it is more likely than not that a portion of Nimbus Corporation's recognized
deferred tax asset will not be realized. What accounting response is appropriate under U.S. GAAP?
A. Record a valuation allowance for the portion not expected to be realized
B. Reclassify the deferred tax asset to other comprehensive income
C. Write off the entire deferred tax asset automatically
D. Leave the deferred tax asset unchanged until the underlying tax attribute expires
Correct Answer: A. Record a valuation allowance for the portion not expected to be realized
Explanation: A deferred tax asset is reduced by a valuation allowance when, based on available evidence, realization of
some portion is not more likely than not. The allowance is reassessed each reporting period.
, 5. Xenon Corporation reports a large loss that is unusual but does not qualify as a discontinued operation. Under
current U.S. GAAP, how is the loss generally presented?
A. Directly in other comprehensive income
B. Within income from continuing operations, with separate presentation or disclosure if useful
C. As a prior-period adjustment to beginning retained earnings
D. As an extraordinary item below net income
Correct Answer: B. Within income from continuing operations, with separate presentation or disclosure if useful
Explanation: U.S. GAAP no longer presents extraordinary items as a separate income-statement category. An unusual
or infrequent item that does not qualify as discontinued operations remains in continuing operations, with appropriate
separate presentation or disclosure when material.
6. Ion Corporation reports net income of $720,000, beginning total assets of $5,000,000, and ending total assets of
$5,600,000. What is return on average assets?
A. 14.4%
B. 13.6%
C. 12.9%
D. 736.1%
Correct Answer: B. 13.6%
Explanation: Return on average assets = net income / average total assets. Average assets are ($5,000,000 +
$5,600,000) / 2 = $5,300,000, giving ROA of 13.6%.
7. What perspective does Granite Corporation use in a fair value measurement?
A. Market-participant assumptions in an orderly transaction at the measurement date
B. Only management's entity-specific planned use
C. A forced liquidation price
D. The original vendor's historical cost
Correct Answer: A. Market-participant assumptions in an orderly transaction at the measurement date
Explanation: Fair value is a market-based exit-price notion based on assumptions market participants would use in an
orderly transaction at the measurement date.
8. Why does Willow Corporation disclose significant accounting policies in the notes?
A. To explain important recognition, measurement, and presentation policies needed to understand the financial
statements
B. To disclose management compensation only
C. To replace the primary financial statements
D. To eliminate the need for estimates
Correct Answer: A. To explain important recognition, measurement, and presentation policies needed to understand
the financial statements
Explanation: Significant accounting-policy disclosures help users understand the principles and methods used to
prepare the financial statements and interpret amounts consistently.
