WGU_D104: Intermediate Accounting II Prep with
Detailed Rationales
Course Code: WGU_D104
Course Name: Intermediate Accounting II
Topic: Complete Liabilities & Equity OA Blueprint & Formula Sheets
Academic Year: 2026/2027
Question 1
A corporate accountant is evaluating a long-term bond issuance under US GAAP
(ASC 470). On January 1, 2026, a company issues $1,000,000 face value, 10-year
bonds with a stated annual interest rate of 6%, paid semi-annually on June 30 and
December 31. The market interest rate (effective yield) at the date of issuance is
8%. How should the accountant immediately classify the difference between the
cash proceeds received and the face value of the bonds?
A. A direct debit entry to an equity account items panel.
B. A contra-liability account (Discount on Bonds Payable) that reduces the
carrying value of the debt.
C. An immediate operating expense recorded on the current year multi-step income
statement.
,D. An adjunct-liability account (Premium on Bonds Payable) that inflates the net
debt balance.
CORRECT ANSWER: B
RATIONALE: Under US GAAP, when the stated interest rate (6%) is lower
than the market interest rate (8%), bonds sell at an amount below face value (a
discount). The difference between the cash proceeds and the face value is debited
to Discount on Bonds Payable, which is a contra-liability account. This account
is presented on the balance sheet as a direct deduction from the face value of the
bonds to report the net carrying value. A premium occurs only if the stated rate
exceeds the market rate.
Question 2
The corporate finance team is analyzing the amortization timeline of a long-term
bond issued at a premium to evaluate non-operating cash outflows.
Based on the amortization behavior illustrated in the curve above, what happens to
the periodic interest expense and the carrying value of the bond over time when
using the effective-interest method for a bond issued at a premium?
A. Both periodic interest expense and carrying value increase steadily until
maturity.
B. Periodic interest expense increases while the carrying value drops toward face
value.
C. Both periodic interest expense and carrying value decrease systematically
over the life of the bond.
D. Periodic interest expense remains perfectly constant while carrying value drops
linearly.
CORRECT ANSWER: C
RATIONALE: Under the effective-interest method, periodic interest expense
is calculated by multiplying the carrying value of the bond at the beginning of the
period by the effective (market) interest rate. For a bond issued at a premium, the
carrying value decreases each period as the premium is amortized toward the face
value (as shown in the chart). Because the carrying value is decreasing, the
resulting periodic interest expense must also decrease over time. Straight-line
amortization would yield constant interest expense, but it is not preferred under US
,GAAP unless the results are not materially different from the effective-interest
method.
Question 3
A corporation sponsors a defined benefit pension plan for its employees. At the
end of the fiscal year, the actuary reports that the Projected Benefit Obligation
(PBO) is $2,500,000, and the fair value of the pension plan assets is $1,900,000.
Under ASC 715 (Compensation—Retirement Benefits), how must this pension
plan be reported on the year-end balance sheet?
A. As a footnote disclosure only, keeping the financial statements completely
unadjusted.
B. As a current asset item valued at the net difference of $600,000.
C. As a long-term liability (Pension Liability) valued at a net underfunded
amount of $600,000.
D. As a direct operational deduction from accumulated other comprehensive
income.
CORRECT ANSWER: C
RATIONALE: Under ASC 715, companies must recognize the funded status of
their defined benefit postretirement plans directly on the balance sheet. Funded
status is calculated as the Fair Value of Plan Assets minus the Projected Benefit
Obligation (PBO). If the PBO exceeds the plan assets ($2,500,000 - $1,900,000 =
$600,000), the plan is underfunded, and the net amount must be reported as a
Pension Liability. This liability is generally classified as non-current (long-term),
except to the extent that the next 12 months of benefit payments exceed plan
assets.
Question 4
A legal department notifies the corporate controller that the company is a
defendant in a pending patent infringement lawsuit. The company's legal counsel
determines that an unfavorable outcome is probable and estimates that the
damages will realistically range anywhere between $100,000 and $400,000, with
no single amount within that range representing a better estimate than any other.
Under ASC 450 (Contingencies), how should the accountant record this loss
, contingency?
A. Disclose the lawsuit in the footnotes without recording a financial ledger entry.
B. Accrue a loss contingency and liability for the maximum amount of $400,000.
C. Defer recording any adjustments until a final court verdict is issued.
D. Accrue a loss contingency and liability for the minimum amount of
$100,000, and disclose the remaining potential exposure in the footnotes.
CORRECT ANSWER: D
RATIONALE: Under ASC 450, a loss contingency must be accrued if it is both
probable and reasonably estimable. When the evaluation identifies a range of loss
but no single amount within that range is a better estimate than any other, US
GAAP explicitly dictates that the company must accrue the minimum amount in
the range ($100,000). The remaining potential loss up to the maximum ($300,000
extra exposure) must be disclosed in the footnotes to fulfill full-disclosure
principles. Note that IFRS rules would require the midpoint of the range, making
this a high-yield US GAAP distinction for the D104 OA.
Question 5
On January 1, 2026, a corporation grants 10,000 stock options to key executives as
part of a compensation plan. The options have a 3-year service vesting period.
Using an option-pricing model, the company determines the total fair value of the
options on the grant date to be $300,000. Under ASC 718 (Compensation—Stock
Compensation), how much Compensation Expense should the company
recognize on its income statement for the fiscal year ended December 31, 2026?
A. $300,000
B. $100,000.
C. $0, because options have not been exercised yet.
D. $150,000
CORRECT ANSWER: B
RATIONALE: Under ASC 718, stock-based compensation is measured based
on the fair value of the equity instruments on the grant date. This total fair value
($300,000) must be allocated systematically as an expense over the required
service period (vesting period). Annual Compensation Expense = Total Fair Value
/ Vesting Period = $300, years = $100,000 for the first year. Future changes
Detailed Rationales
Course Code: WGU_D104
Course Name: Intermediate Accounting II
Topic: Complete Liabilities & Equity OA Blueprint & Formula Sheets
Academic Year: 2026/2027
Question 1
A corporate accountant is evaluating a long-term bond issuance under US GAAP
(ASC 470). On January 1, 2026, a company issues $1,000,000 face value, 10-year
bonds with a stated annual interest rate of 6%, paid semi-annually on June 30 and
December 31. The market interest rate (effective yield) at the date of issuance is
8%. How should the accountant immediately classify the difference between the
cash proceeds received and the face value of the bonds?
A. A direct debit entry to an equity account items panel.
B. A contra-liability account (Discount on Bonds Payable) that reduces the
carrying value of the debt.
C. An immediate operating expense recorded on the current year multi-step income
statement.
,D. An adjunct-liability account (Premium on Bonds Payable) that inflates the net
debt balance.
CORRECT ANSWER: B
RATIONALE: Under US GAAP, when the stated interest rate (6%) is lower
than the market interest rate (8%), bonds sell at an amount below face value (a
discount). The difference between the cash proceeds and the face value is debited
to Discount on Bonds Payable, which is a contra-liability account. This account
is presented on the balance sheet as a direct deduction from the face value of the
bonds to report the net carrying value. A premium occurs only if the stated rate
exceeds the market rate.
Question 2
The corporate finance team is analyzing the amortization timeline of a long-term
bond issued at a premium to evaluate non-operating cash outflows.
Based on the amortization behavior illustrated in the curve above, what happens to
the periodic interest expense and the carrying value of the bond over time when
using the effective-interest method for a bond issued at a premium?
A. Both periodic interest expense and carrying value increase steadily until
maturity.
B. Periodic interest expense increases while the carrying value drops toward face
value.
C. Both periodic interest expense and carrying value decrease systematically
over the life of the bond.
D. Periodic interest expense remains perfectly constant while carrying value drops
linearly.
CORRECT ANSWER: C
RATIONALE: Under the effective-interest method, periodic interest expense
is calculated by multiplying the carrying value of the bond at the beginning of the
period by the effective (market) interest rate. For a bond issued at a premium, the
carrying value decreases each period as the premium is amortized toward the face
value (as shown in the chart). Because the carrying value is decreasing, the
resulting periodic interest expense must also decrease over time. Straight-line
amortization would yield constant interest expense, but it is not preferred under US
,GAAP unless the results are not materially different from the effective-interest
method.
Question 3
A corporation sponsors a defined benefit pension plan for its employees. At the
end of the fiscal year, the actuary reports that the Projected Benefit Obligation
(PBO) is $2,500,000, and the fair value of the pension plan assets is $1,900,000.
Under ASC 715 (Compensation—Retirement Benefits), how must this pension
plan be reported on the year-end balance sheet?
A. As a footnote disclosure only, keeping the financial statements completely
unadjusted.
B. As a current asset item valued at the net difference of $600,000.
C. As a long-term liability (Pension Liability) valued at a net underfunded
amount of $600,000.
D. As a direct operational deduction from accumulated other comprehensive
income.
CORRECT ANSWER: C
RATIONALE: Under ASC 715, companies must recognize the funded status of
their defined benefit postretirement plans directly on the balance sheet. Funded
status is calculated as the Fair Value of Plan Assets minus the Projected Benefit
Obligation (PBO). If the PBO exceeds the plan assets ($2,500,000 - $1,900,000 =
$600,000), the plan is underfunded, and the net amount must be reported as a
Pension Liability. This liability is generally classified as non-current (long-term),
except to the extent that the next 12 months of benefit payments exceed plan
assets.
Question 4
A legal department notifies the corporate controller that the company is a
defendant in a pending patent infringement lawsuit. The company's legal counsel
determines that an unfavorable outcome is probable and estimates that the
damages will realistically range anywhere between $100,000 and $400,000, with
no single amount within that range representing a better estimate than any other.
Under ASC 450 (Contingencies), how should the accountant record this loss
, contingency?
A. Disclose the lawsuit in the footnotes without recording a financial ledger entry.
B. Accrue a loss contingency and liability for the maximum amount of $400,000.
C. Defer recording any adjustments until a final court verdict is issued.
D. Accrue a loss contingency and liability for the minimum amount of
$100,000, and disclose the remaining potential exposure in the footnotes.
CORRECT ANSWER: D
RATIONALE: Under ASC 450, a loss contingency must be accrued if it is both
probable and reasonably estimable. When the evaluation identifies a range of loss
but no single amount within that range is a better estimate than any other, US
GAAP explicitly dictates that the company must accrue the minimum amount in
the range ($100,000). The remaining potential loss up to the maximum ($300,000
extra exposure) must be disclosed in the footnotes to fulfill full-disclosure
principles. Note that IFRS rules would require the midpoint of the range, making
this a high-yield US GAAP distinction for the D104 OA.
Question 5
On January 1, 2026, a corporation grants 10,000 stock options to key executives as
part of a compensation plan. The options have a 3-year service vesting period.
Using an option-pricing model, the company determines the total fair value of the
options on the grant date to be $300,000. Under ASC 718 (Compensation—Stock
Compensation), how much Compensation Expense should the company
recognize on its income statement for the fiscal year ended December 31, 2026?
A. $300,000
B. $100,000.
C. $0, because options have not been exercised yet.
D. $150,000
CORRECT ANSWER: B
RATIONALE: Under ASC 718, stock-based compensation is measured based
on the fair value of the equity instruments on the grant date. This total fair value
($300,000) must be allocated systematically as an expense over the required
service period (vesting period). Annual Compensation Expense = Total Fair Value
/ Vesting Period = $300, years = $100,000 for the first year. Future changes
