WGU D774 - Intro to Business Accounting PA exam test questions
and correct answers 2026 A+ rated
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Section 1: General (Questions 1-90)
1 Under the accrual basis of accounting, when should a company recognize
revenue for services performed on credit in December, with cash collected in
January?
A) In December, when the service is performed, regardless of cash collection
B) In January, when cash is received
C) Spread evenly between December and January
D) In December only if a written contract exists
Answer: A
Rationale: Accrual accounting recognizes revenue when earned, not when cash
changes hands. Since the service was performed in December, revenue is
recognized in December even if cash is received later. Cash basis would defer to
January, but accrual is required by GAAP.
2 A company purchases equipment for $100,000 with an estimated useful life of
10 years and a salvage value of $10,000. Using the double-declining balance
method, what is the depreciation expense for the second year?
A) $16,000
B) $18,000
C) $20,000
D) $14,400
Answer: A
Rationale: Double-declining rate = (1/10) * 2 = 20%. Year 1 depreciation =
$100,000
* 20% = $20,000. Book value at start of year 2 = $80,000. Year 2 depreciation =
$80,000 * 20% = $16,000. Salvage value is ignored in the calculation until later
years, but the asset cannot be depreciated below salvage.
,3 A company issues $1,000,000 face value, 5-year bonds with a stated interest
rate of 8% when the market rate is 10%. Interest is paid semiannually. How
does the issue price compare to face value, and why?
A) The bonds sell at a discount because the stated rate is below the market rate
B) The bonds sell at a premium because the stated rate is below the market rate
C) The bonds sell at face value because the term is fixed
D) The bonds sell at a discount because the market rate is lower than the stated
rate
Answer: A
Rationale: When the stated interest rate is less than the market rate, investors
demand a lower price to achieve a higher effective yield, resulting in a discount.
The bond is issued at a discount to compensate for the lower coupon payments
relative to current market rates.
4 A company has current assets of $500,000, including inventory of $200,000,
and current liabilities of $250,000. What is the quick ratio, and what does it
indicate?
A) 1.2; indicates ability to cover short-term obligations without relying on
inventory
B) 2.0; indicates strong liquidity including inventory
C) 1.2; indicates potential liquidity problems
D) 2.0; indicates excessive reliance on inventory
Answer: A
Rationale: Quick ratio = (Current Assets - Inventory) / Current Liabilities = (
$500,000 - $200,000) / $250,000 = 1.2. This measures immediate liquidity without
inventory, suggesting the company can cover current liabilities with its most
liquid assets. A ratio above 1 is generally considered acceptable.
5 A company uses a perpetual inventory system and sells goods on account for
$5,000 that cost $3,000. What is the correct journal entry to record the sale?
A) Debit Accounts Receivable $5,000; Credit Sales Revenue $5,000; Debit Cost
of Goods Sold $3,000; Credit Inventory $3,000
B) Debit Sales Revenue $5,000; Credit Accounts Receivable $5,000; Debit
Inventory $3,000; Credit Cost of Goods Sold $3,000
,C) Debit Cash $5,000; Credit Sales Revenue $5,000; Debit Cost of Goods Sold
$3,000; Credit Inventory $3,000
D) Debit Accounts Receivable $5,000; Credit Sales Revenue $5,000; Debit
Inventory $3,000; Credit Cost of Goods Sold $3,000
Answer: A
Rationale: In a perpetual system, two entries are made: one to record the sale at
selling price (debit AR, credit Sales Revenue) and one to record the cost of goods
sold (debit COGS, credit Inventory). This updates inventory and COGS in real
time, reflecting the cost of the goods sold.
6 A company's statement of cash flows shows net cash provided by operating
activities of $50,000, net cash used in investing activities of $30,000, and net
cash provided by financing activities of $10,000. If the beginning cash balance
was $20,000, what is the ending cash balance?
A) $50,000
B) $70,000
C) $10,000
D) $30,000
Answer: A
Rationale: Net change in cash = $50,000 - $30,000 + $10,000 = $30,000. Ending
cash = Beginning cash + Net change = $20,000 + $30,000 = $50,000. The
statement of cash flows reconciles to the cash balance on the balance sheet.
7 A company uses a job-order costing system. Manufacturing overhead is
applied at a predetermined rate of $25 per direct labor hour. Actual overhead
costs were $120,000, and actual direct labor hours were 5,000. What is the
overhead variance, and how is it typically treated?
A) $5,000 overapplied; closed to Cost of Goods Sold
B) $5,000 underapplied; closed to Cost of Goods Sold
C) $5,000 overapplied; allocated between Work in Process, Finished Goods, and
Cost of Goods Sold
D) $5,000 underapplied; allocated between Work in Process, Finished Goods,
and Cost of Goods Sold
Answer: A
, Rationale: Applied overhead = $25 * 5,000 hours = $125,000. Since applied (
$125,000) exceeds actual ($120,000), overhead is overapplied by $5,000. If the
variance is immaterial, it is typically closed to Cost of Goods Sold, reducing
COGS.
Material variances may be allocated, but immaterial ones are closed to COGS.
8 A company has total assets of $800,000, total liabilities of $300,000, and
common stock of $100,000. What is the amount of retained earnings?
A) $400,000
B) $300,000
C) $500,000
D) $200,000
Answer: A
Rationale: Accounting equation: Assets = Liabilities + Equity. Equity = $800,000
$300,000 = $500,000. Equity consists of common stock and retained earnings, so
retained earnings = $500,000 - $100,000 = $400,000. This reflects the
accumulated profits not distributed to shareholders.
9 A company uses the allowance method for uncollectible accounts. At year-end,
the accounts receivable balance is $200,000, and the aging schedule indicates
that 5 % is uncollectible. The Allowance for Doubtful Accounts currently has
a credit balance of $2,000. What is the adjusting entry for bad debt expense?
A) Debit Bad Debt Expense $8,000; Credit Allowance for Doubtful Accounts
$8,000
B) Debit Bad Debt Expense $10,000; Credit Allowance for Doubtful
Accounts $10,000
C) Debit Bad Debt Expense $2,000; Credit Allowance for Doubtful Accounts
$2,000
D) Debit Allowance for Doubtful Accounts $8,000; Credit Bad Debt Expense
$8,000
Answer: A
Rationale: Required balance in the allowance = $200,000 * 5% = $10,000. Since
the allowance already has a credit balance of $2,000, the adjustment is $10,000
- $2,000 = $8,000. The entry debits Bad Debt Expense and credits the
allowance, increasing it to the desired balance.
and correct answers 2026 A+ rated
.
Section 1: General (Questions 1-90)
1 Under the accrual basis of accounting, when should a company recognize
revenue for services performed on credit in December, with cash collected in
January?
A) In December, when the service is performed, regardless of cash collection
B) In January, when cash is received
C) Spread evenly between December and January
D) In December only if a written contract exists
Answer: A
Rationale: Accrual accounting recognizes revenue when earned, not when cash
changes hands. Since the service was performed in December, revenue is
recognized in December even if cash is received later. Cash basis would defer to
January, but accrual is required by GAAP.
2 A company purchases equipment for $100,000 with an estimated useful life of
10 years and a salvage value of $10,000. Using the double-declining balance
method, what is the depreciation expense for the second year?
A) $16,000
B) $18,000
C) $20,000
D) $14,400
Answer: A
Rationale: Double-declining rate = (1/10) * 2 = 20%. Year 1 depreciation =
$100,000
* 20% = $20,000. Book value at start of year 2 = $80,000. Year 2 depreciation =
$80,000 * 20% = $16,000. Salvage value is ignored in the calculation until later
years, but the asset cannot be depreciated below salvage.
,3 A company issues $1,000,000 face value, 5-year bonds with a stated interest
rate of 8% when the market rate is 10%. Interest is paid semiannually. How
does the issue price compare to face value, and why?
A) The bonds sell at a discount because the stated rate is below the market rate
B) The bonds sell at a premium because the stated rate is below the market rate
C) The bonds sell at face value because the term is fixed
D) The bonds sell at a discount because the market rate is lower than the stated
rate
Answer: A
Rationale: When the stated interest rate is less than the market rate, investors
demand a lower price to achieve a higher effective yield, resulting in a discount.
The bond is issued at a discount to compensate for the lower coupon payments
relative to current market rates.
4 A company has current assets of $500,000, including inventory of $200,000,
and current liabilities of $250,000. What is the quick ratio, and what does it
indicate?
A) 1.2; indicates ability to cover short-term obligations without relying on
inventory
B) 2.0; indicates strong liquidity including inventory
C) 1.2; indicates potential liquidity problems
D) 2.0; indicates excessive reliance on inventory
Answer: A
Rationale: Quick ratio = (Current Assets - Inventory) / Current Liabilities = (
$500,000 - $200,000) / $250,000 = 1.2. This measures immediate liquidity without
inventory, suggesting the company can cover current liabilities with its most
liquid assets. A ratio above 1 is generally considered acceptable.
5 A company uses a perpetual inventory system and sells goods on account for
$5,000 that cost $3,000. What is the correct journal entry to record the sale?
A) Debit Accounts Receivable $5,000; Credit Sales Revenue $5,000; Debit Cost
of Goods Sold $3,000; Credit Inventory $3,000
B) Debit Sales Revenue $5,000; Credit Accounts Receivable $5,000; Debit
Inventory $3,000; Credit Cost of Goods Sold $3,000
,C) Debit Cash $5,000; Credit Sales Revenue $5,000; Debit Cost of Goods Sold
$3,000; Credit Inventory $3,000
D) Debit Accounts Receivable $5,000; Credit Sales Revenue $5,000; Debit
Inventory $3,000; Credit Cost of Goods Sold $3,000
Answer: A
Rationale: In a perpetual system, two entries are made: one to record the sale at
selling price (debit AR, credit Sales Revenue) and one to record the cost of goods
sold (debit COGS, credit Inventory). This updates inventory and COGS in real
time, reflecting the cost of the goods sold.
6 A company's statement of cash flows shows net cash provided by operating
activities of $50,000, net cash used in investing activities of $30,000, and net
cash provided by financing activities of $10,000. If the beginning cash balance
was $20,000, what is the ending cash balance?
A) $50,000
B) $70,000
C) $10,000
D) $30,000
Answer: A
Rationale: Net change in cash = $50,000 - $30,000 + $10,000 = $30,000. Ending
cash = Beginning cash + Net change = $20,000 + $30,000 = $50,000. The
statement of cash flows reconciles to the cash balance on the balance sheet.
7 A company uses a job-order costing system. Manufacturing overhead is
applied at a predetermined rate of $25 per direct labor hour. Actual overhead
costs were $120,000, and actual direct labor hours were 5,000. What is the
overhead variance, and how is it typically treated?
A) $5,000 overapplied; closed to Cost of Goods Sold
B) $5,000 underapplied; closed to Cost of Goods Sold
C) $5,000 overapplied; allocated between Work in Process, Finished Goods, and
Cost of Goods Sold
D) $5,000 underapplied; allocated between Work in Process, Finished Goods,
and Cost of Goods Sold
Answer: A
, Rationale: Applied overhead = $25 * 5,000 hours = $125,000. Since applied (
$125,000) exceeds actual ($120,000), overhead is overapplied by $5,000. If the
variance is immaterial, it is typically closed to Cost of Goods Sold, reducing
COGS.
Material variances may be allocated, but immaterial ones are closed to COGS.
8 A company has total assets of $800,000, total liabilities of $300,000, and
common stock of $100,000. What is the amount of retained earnings?
A) $400,000
B) $300,000
C) $500,000
D) $200,000
Answer: A
Rationale: Accounting equation: Assets = Liabilities + Equity. Equity = $800,000
$300,000 = $500,000. Equity consists of common stock and retained earnings, so
retained earnings = $500,000 - $100,000 = $400,000. This reflects the
accumulated profits not distributed to shareholders.
9 A company uses the allowance method for uncollectible accounts. At year-end,
the accounts receivable balance is $200,000, and the aging schedule indicates
that 5 % is uncollectible. The Allowance for Doubtful Accounts currently has
a credit balance of $2,000. What is the adjusting entry for bad debt expense?
A) Debit Bad Debt Expense $8,000; Credit Allowance for Doubtful Accounts
$8,000
B) Debit Bad Debt Expense $10,000; Credit Allowance for Doubtful
Accounts $10,000
C) Debit Bad Debt Expense $2,000; Credit Allowance for Doubtful Accounts
$2,000
D) Debit Allowance for Doubtful Accounts $8,000; Credit Bad Debt Expense
$8,000
Answer: A
Rationale: Required balance in the allowance = $200,000 * 5% = $10,000. Since
the allowance already has a credit balance of $2,000, the adjustment is $10,000
- $2,000 = $8,000. The entry debits Bad Debt Expense and credits the
allowance, increasing it to the desired balance.
