WGU D104 Intermediate Accounting II Units 4–6 Practice Exam
135 Questions with Answers, Detailed Rationales and Worked
Calculations
1. A company issued a 5-year note payable in the amount of $15,000. The
note bears the market interest rate of 5%. At Year 3, the market rate of
interest is 3%. Which journal entry is appropriate for recording interest at
the end of the third year?
Answer Debit Interest Expense for $750; credit Cash for $750
Rationale The fixed contractual rate remains 5%; $15,000 × 5% = $750. A later
market-rate change does not reset interest on this fixed-rate note accounted for
at amortized cost.
2. Equipment is placed in service on January 1. The cost of the equipment is
$250,000 with a salvage value of $25,000 and an estimated useful life of five
years. Which amount of annual depreciation expense should be recorded
on December 31 of Year 2 under the sum-of-years'-digits method?
Answer $60,000
Rationale The depreciable base is $250,000 − $25,000 = $225,000. For a five-
year life, the digit sum is 15; Year 2 uses 4/15, giving $60,000.
3. A company placed an asset into service on Day 1 of Year 1 with the
following data related to the purchase: Cost of machinery $225,000
Estimated salvage value $75,000 Product life hours 75,000 hours Useful life
5 years Hours used in Year 1 5,000 hours Which amount of annual
depreciation expense should be recorded in the first year using the activity
method?
Answer $10,000
Rationale The hourly depreciation rate is ($225,000 − $75,000)/75,000 = $2.
Multiply by 5,000 hours for $10,000.
4. On July 1, a company placed into service a vehicle for $50,000 with an
estimated useful life of five years and no salvage value. The company
prepares accrual-basis financial statements on a calendar-year basis. How
many months should be included in the calculation of depreciation expense
for the year of acquisition using the double-declining-balance method?
D104 Units 4 to 6 | 1
,Answer 6
Rationale July through December comprises six months. A time-based double-
declining charge is prorated for the period in service when monthly proration is
used.
5. A company purchased a piece of equipment for $120,000 and estimated
that the asset will have no salvage value at the end of its 15-year useful life.
At the end of Year 5 of ownership, when accumulated depreciation was
$40,000 and the asset's book value was $80,000, the company revised the
asset's estimated useful life to a total of 10 years. What is the appropriate
accounting treatment beginning with Year 6?
Answer The equipment will depreciate $80,000 over the next five years.
Rationale This is a change in estimate, applied prospectively. The remaining
carrying amount is $80,000 and revised remaining life is five years; annual
depreciation becomes $16,000.
6. A company using the composite approach to depreciation sells
equipment for $10,000. The equipment was purchased five years earlier for
$15,000, and the company has already recorded $5,000 in accumulated
depreciation. What is included in the journal entry for the sale of the
equipment?
Answer Debit accumulated depreciation-equipment for $5,000
Rationale Under composite depreciation, normal retirements remove original
cost and charge cost less proceeds to group accumulated depreciation. Here
$15,000 − $10,000 = $5,000; no separate disposal gain or loss is recorded.
7. A steel manufacturer uses the production variable method for
depreciating assets. Which combination best describes the depreciation
method used?
Answer Straight-line and activity
Rationale The production-variable or hybrid approach described combines a
time-based straight-line component with an activity-based component. It
accounts for both elapsed time and production usage.
D104 Units 4 to 6 | 2
,8. A company owns an asset with an original cost of $300,000 and a current
book value of $160,000. During a review of the asset for impairment, the
company estimates the expected future cash flows from the use and
disposal of the asset to be $200,000. There is an active market for this asset,
and the fair value of the asset, calculated as the present value of expected
future cash flows, is $140,000. Should this asset be considered impaired?
Answer No, because the estimate of expected future cash flows (undiscounted)
is greater than the book value.
Rationale The held-and-used asset passes the undiscounted cash-flow test:
$200,000 exceeds its $160,000 carrying amount. Lower fair value alone does not
require an impairment loss under this model.
9. Several years ago, a company acquired an asset at a cost of $400,000.
Last year, the company recognized an impairment loss of $25,000 and
properly reduced the asset's book value from $250,000 to $225,000. Using
the asset's new base of $225,000, the company calculates depreciation for
the current year to be $10,000, bringing the book value down to $215,000.
However, the company has also determined that the asset's fair value has
recovered and is now estimated to be $260,000. How should the company
measure the asset on its current balance sheet?
Answer The company should not reverse the impairment and should depreciate
the asset by $10,000 to a new book value of $215,000.
Rationale US GAAP does not reverse an impairment on a held-and-used long-
lived asset. Depreciation reduces the new basis from $225,000 to $215,000
despite the later fair-value increase.
10. A company invests $15,000,000 into a coal mine estimated to have 20
million tons of coal. The coal mine is estimated to be in operation for the
next five years. In Year 1, the company extracted and sold 1 million tons of
coal. How much is depletion in Year 1?
Answer $750,000
Rationale Cost per ton is $15,000,000/20,000,000 = $0.75. The 1,000,000 tons
extracted and sold carry depletion expense of $750,000.
D104 Units 4 to 6 | 3
, 11. A company invested $15,000,000 in a coal mine estimated to have
1,500,000 tons of coal. In the first year, the company extracted 100,000 tons
of coal. At the end of the first year, it became clear that the coal mine was
likely to have only another 700,000 tons of coal remaining. Which depletion
rate will be used starting in the second year?
Answer $20.00 per ton
Rationale First-year depletion is $15,000,000/1,500,000 × 100,000 =
$1,000,000. Allocate the remaining $14,000,000 prospectively over 700,000
remaining tons: $20 per ton. Dividing the original $15,000,000 by remaining tons
would be incorrect.
12. A company reported total assets of $10,000,000 as of December 31,
2018, and $14,000,000 as of December 31, 2019. Net sales revenue was
$6,000,000 for the year ending December 31, 2018, and $8,000,000 for the
year ending December 31, 2019. What was the company's asset turnover
ratio for the year ending December 31, 2019?
Answer 0.67
Rationale Average total assets are ($10,000,000 + $14,000,000)/2 =
$12,000,000. Asset turnover is $8,000,000/$12,000,000 = 0.6667, rounded to
0.67 times.
13. A company's profit margin on sales was 2.50%, and its asset turnover
was 0.50. What was the company's return on assets for this period?
Answer 1.25%
Rationale Return on assets equals profit margin × asset turnover under the net-
income convention. 2.50% × 0.50 = 1.25%.
14. A company reported the following information in its 2019 annual
report: Net sales $ 750,000 Total assets at the end of year 2 $ 500,000 Total
assets at the end of year 1 $ 450,000 Net income $ 120,000 What is the
company's profit margin on sales?
Answer 16%
Rationale Profit margin is net income/net sales: $120,000/$750,000 = 16%.
Asset amounts do not enter this calculation.
D104 Units 4 to 6 | 4
135 Questions with Answers, Detailed Rationales and Worked
Calculations
1. A company issued a 5-year note payable in the amount of $15,000. The
note bears the market interest rate of 5%. At Year 3, the market rate of
interest is 3%. Which journal entry is appropriate for recording interest at
the end of the third year?
Answer Debit Interest Expense for $750; credit Cash for $750
Rationale The fixed contractual rate remains 5%; $15,000 × 5% = $750. A later
market-rate change does not reset interest on this fixed-rate note accounted for
at amortized cost.
2. Equipment is placed in service on January 1. The cost of the equipment is
$250,000 with a salvage value of $25,000 and an estimated useful life of five
years. Which amount of annual depreciation expense should be recorded
on December 31 of Year 2 under the sum-of-years'-digits method?
Answer $60,000
Rationale The depreciable base is $250,000 − $25,000 = $225,000. For a five-
year life, the digit sum is 15; Year 2 uses 4/15, giving $60,000.
3. A company placed an asset into service on Day 1 of Year 1 with the
following data related to the purchase: Cost of machinery $225,000
Estimated salvage value $75,000 Product life hours 75,000 hours Useful life
5 years Hours used in Year 1 5,000 hours Which amount of annual
depreciation expense should be recorded in the first year using the activity
method?
Answer $10,000
Rationale The hourly depreciation rate is ($225,000 − $75,000)/75,000 = $2.
Multiply by 5,000 hours for $10,000.
4. On July 1, a company placed into service a vehicle for $50,000 with an
estimated useful life of five years and no salvage value. The company
prepares accrual-basis financial statements on a calendar-year basis. How
many months should be included in the calculation of depreciation expense
for the year of acquisition using the double-declining-balance method?
D104 Units 4 to 6 | 1
,Answer 6
Rationale July through December comprises six months. A time-based double-
declining charge is prorated for the period in service when monthly proration is
used.
5. A company purchased a piece of equipment for $120,000 and estimated
that the asset will have no salvage value at the end of its 15-year useful life.
At the end of Year 5 of ownership, when accumulated depreciation was
$40,000 and the asset's book value was $80,000, the company revised the
asset's estimated useful life to a total of 10 years. What is the appropriate
accounting treatment beginning with Year 6?
Answer The equipment will depreciate $80,000 over the next five years.
Rationale This is a change in estimate, applied prospectively. The remaining
carrying amount is $80,000 and revised remaining life is five years; annual
depreciation becomes $16,000.
6. A company using the composite approach to depreciation sells
equipment for $10,000. The equipment was purchased five years earlier for
$15,000, and the company has already recorded $5,000 in accumulated
depreciation. What is included in the journal entry for the sale of the
equipment?
Answer Debit accumulated depreciation-equipment for $5,000
Rationale Under composite depreciation, normal retirements remove original
cost and charge cost less proceeds to group accumulated depreciation. Here
$15,000 − $10,000 = $5,000; no separate disposal gain or loss is recorded.
7. A steel manufacturer uses the production variable method for
depreciating assets. Which combination best describes the depreciation
method used?
Answer Straight-line and activity
Rationale The production-variable or hybrid approach described combines a
time-based straight-line component with an activity-based component. It
accounts for both elapsed time and production usage.
D104 Units 4 to 6 | 2
,8. A company owns an asset with an original cost of $300,000 and a current
book value of $160,000. During a review of the asset for impairment, the
company estimates the expected future cash flows from the use and
disposal of the asset to be $200,000. There is an active market for this asset,
and the fair value of the asset, calculated as the present value of expected
future cash flows, is $140,000. Should this asset be considered impaired?
Answer No, because the estimate of expected future cash flows (undiscounted)
is greater than the book value.
Rationale The held-and-used asset passes the undiscounted cash-flow test:
$200,000 exceeds its $160,000 carrying amount. Lower fair value alone does not
require an impairment loss under this model.
9. Several years ago, a company acquired an asset at a cost of $400,000.
Last year, the company recognized an impairment loss of $25,000 and
properly reduced the asset's book value from $250,000 to $225,000. Using
the asset's new base of $225,000, the company calculates depreciation for
the current year to be $10,000, bringing the book value down to $215,000.
However, the company has also determined that the asset's fair value has
recovered and is now estimated to be $260,000. How should the company
measure the asset on its current balance sheet?
Answer The company should not reverse the impairment and should depreciate
the asset by $10,000 to a new book value of $215,000.
Rationale US GAAP does not reverse an impairment on a held-and-used long-
lived asset. Depreciation reduces the new basis from $225,000 to $215,000
despite the later fair-value increase.
10. A company invests $15,000,000 into a coal mine estimated to have 20
million tons of coal. The coal mine is estimated to be in operation for the
next five years. In Year 1, the company extracted and sold 1 million tons of
coal. How much is depletion in Year 1?
Answer $750,000
Rationale Cost per ton is $15,000,000/20,000,000 = $0.75. The 1,000,000 tons
extracted and sold carry depletion expense of $750,000.
D104 Units 4 to 6 | 3
, 11. A company invested $15,000,000 in a coal mine estimated to have
1,500,000 tons of coal. In the first year, the company extracted 100,000 tons
of coal. At the end of the first year, it became clear that the coal mine was
likely to have only another 700,000 tons of coal remaining. Which depletion
rate will be used starting in the second year?
Answer $20.00 per ton
Rationale First-year depletion is $15,000,000/1,500,000 × 100,000 =
$1,000,000. Allocate the remaining $14,000,000 prospectively over 700,000
remaining tons: $20 per ton. Dividing the original $15,000,000 by remaining tons
would be incorrect.
12. A company reported total assets of $10,000,000 as of December 31,
2018, and $14,000,000 as of December 31, 2019. Net sales revenue was
$6,000,000 for the year ending December 31, 2018, and $8,000,000 for the
year ending December 31, 2019. What was the company's asset turnover
ratio for the year ending December 31, 2019?
Answer 0.67
Rationale Average total assets are ($10,000,000 + $14,000,000)/2 =
$12,000,000. Asset turnover is $8,000,000/$12,000,000 = 0.6667, rounded to
0.67 times.
13. A company's profit margin on sales was 2.50%, and its asset turnover
was 0.50. What was the company's return on assets for this period?
Answer 1.25%
Rationale Return on assets equals profit margin × asset turnover under the net-
income convention. 2.50% × 0.50 = 1.25%.
14. A company reported the following information in its 2019 annual
report: Net sales $ 750,000 Total assets at the end of year 2 $ 500,000 Total
assets at the end of year 1 $ 450,000 Net income $ 120,000 What is the
company's profit margin on sales?
Answer 16%
Rationale Profit margin is net income/net sales: $120,000/$750,000 = 16%.
Asset amounts do not enter this calculation.
D104 Units 4 to 6 | 4
