WGU D104
Intermediate Accounting II
OA2 (Units 4-6)
Actual Questions with Verified Answers
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What You Will Get:
➢60 OA Exam Questions w/ Answers
➢Complete Units 4, 5, and 6
➢Accounting Rule Included
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,1. A company owns a machine that it purchased on January 1, year 1 for $600,000.
The machine has an estimated useful life of 5 years and an estimated salvage
value of $75,000. The company uses the sum-of-the-years'-digits method. What is
the depreciation expense for each year and book value of the machine at the end
of year 5? Year 1: ($600,000 - $75,000) x 5/15 = $175,000 Year 2: ($600,000 -
$75,000) x 4/15 = $140,000 Year 3: ($600,000 - $75,000) x 3/15 = $105,000 Year 4
Correct Answer:
$(600,000 - $75,000) x 2/15 = $70,000 Year 5: ($600,000 - $75,000) x 1/15 = $35,000
Total accumulated depreciation $525,000 = ($175,000 + $140,000 + $105,000+
$70,000 + $35,000) Book value of the machine at the end of year 5 is its salvage
$75,000 = $600,000 - $525,000
Accounting Rule: the sum-of-the-years'-digits method is an accelerated depreciation
method resulting in higher deprecation cost in the earlier years and lower charges in
later periods. It is a passage of time depreciation method that results in a decreasing
depreciation charge based on a decreasing fraction of depreciable cost (original cost
less salvage value). Each fraction uses the sum of the years as a denominator (e.g. 5
+ 4 + 3 + 2 + 1 = 15). The numerator is the number of years of estimated life
remaining as of the beginning of the year. In this method, the numerator decreases
year by year, and the denominator remains constant (e.g. 5/15, 4/15, 3/15, 2/15, and
1/15). At the end of the asset's useful life, the balance remaining should equal the
salvage value. Never depreciate beyond an asset's salvage value.
2. A company purchased a truck at the beginning of 2020 for $109,200. The truck
is estimated to have a salvage value of $4,200 and a useful life of 120,000 miles. It
was driven 21,000 miles in 2020 and 29,000 miles in 2021. What is the depreciation
expense for 2020 and 2021 using the variable charge method? Year 2020: $18,375
Year 2021
Correct Answer:
$25,375 Formula: ( (Cost - Salvage Value) × Current Miles)/ Total Estimated Miles
Year 2020: (($109,200 - $4,200) × 21,000)/ 120,000 = $18,375 Year 2021: (($109,200
- $4,200) × 29,000)/ 120,000 = $25,375
Accounting Rule: The activity method (also called the variable-charge or units-of-
activity/production approach) assumes that depreciation is a function of use or
, productivity, instead of the passage of time. It calculates depreciation based on the
asset's activity such as the number of units produced or the number of hours/miles the
asset is used during the period. In other words, this method focuses on the actual use
of the asset rather than the passage of time. The amount of depreciation expense is
directly proportional to the amount of the asset's usage. The activity rate is multiplied
by the depreciable cost (original cost less salvage value). Another formula is: (Actual
Activity in Period/Total Estimate Activity) x (Cost - Salvage Value)
3. Equipment with a cost of $450,000 has an estimated salvage value of $30,000
and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the
units-of-activity method. What is the amount of depreciation for the first full year,
during which the equipment was used 2,700 hours?
Correct Answer:
$113,400 $113,400 = (2,,000) x ($450,000 - $30,000)
Accounting Rule: (Actual Activity in Period/Total Estimate Activity) x (Cost - Salvage
Value)
4. 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 Useful life 5 years What amount of annual depreciation expense should
be recorded in the first and second years using double-declining balance method,
and what is the machine's book value for each of the years? Year 1: $90,000
depreciation expense $135,000 book value Year 2
Correct Answer:
$54,000 depreciation expense $81,000 book value
Accounting Rule: the double-declining balance (DDB) method is an accelerated
depreciation that records larger depreciation expenses during the earlier years of an
asset's useful life, and smaller ones in later years. First, divide 100% by the number of
years in the asset's useful life, this is the straight-line depreciation rate. Then, multiply
that number by 2 and that is the double-declining depreciation rate. Multiply that rate
by the asset's book value in each year. Depreciation continues until the asset's value
declines to its salvage value.
5. The activity method of depreciation:
• a. Is a variable charge approach.
• b. Assumes that depreciation is a function of the passage of time.
• c. Conceptually associates cost in terms of input measures.
,9. A company has a policy of calculating depreciation using the nearest fraction
of a year policy. On May 10, the company purchased and placed in service an
asset costing $50,000 with a five-year useful life. The Company uses the straight-
line depreciation method. What fraction is used to calculate the depreciation
expense on December 31 and what is the depreciation expense on December 31?
(round your answer to a whole number)
Correct Answer:
$6,392 $6,392 = (7.67/12) x ($50,000/5)
Accounting Rule: the nearest fraction of a year policy states that the depreciation
expense is prorated at the time the asset is placed in service You need to know the
various fractional-year policies (shown in the attached image)
10. A company purchases an asset on April 5 of the current year. The company
would like to use the depreciation policy that will result in the highest
depreciation expense in the last year of the asset's useful life. Which depreciation
policy should be used?
• a. nearest full month.
• b. half-year convention.
• c. nearest fraction of the year.
• d. full year in period of disposal.
Correct Answer:
d. full year in period of disposal. You need to know the various fractional-year policies
(shown in the attached image.)
11. When depreciation is computed for partial periods under a decreasing charge
depreciation method, it is necessary to:
• a. charge a full year's depreciation to the year of acquisition.
• b. determine depreciation expense for the full year and then prorate the
expense between the two periods involved.
• c. use the straight-line method for the year in which the asset is sold or
otherwise disposed of.
• d. use a salvage value equal to the first year's partial depreciation charge.
, Correct Answer:
1) debit cash 100,000 credit notes payable 100,000 2) debit notes payable 100,000
debit interest expense 2,000* credit cash 102,000 For question 2, the interest
expense equals. ($100,000 x 6%) x 4/12 Interest is calculated on an annual basis.
15. On March 1, 2020, a company borrows money from its bank. The company
signs a $102,000, zero-interest-bearing, four-month note. The present value of the
note is $100,000. The company has a calendar year end and prepares financial
statements annually. What is the journal entry the company records for issuance
of the note?
Correct Answer:
debit cash 100,000 debit discount on notes payable 2,000 credit notes payable
102,000
Accounting Rule: a zero-interest-bearing note does not explicitly state an interest
rate on the face of the note. However, interest is still charged. At maturity, the
borrower must pay back an amount greater than the cash received at the issuance
date. In other words, the borrower receives in cash the present value of the note. The
present value equals the face value of the note at maturity minus the interest or
discount charged by the lender for the term of the note. The bank takes its fee "up
front" rather than on the date the note matures. The note is always credited for is face
value at the time of issuance which is more than the cash received. The discount on
notes payable is the difference between the cash received and the face value of the
note. It represents the cost of borrowing and represents interest expense that will be
charged to future periods. The discount on notes payable is a contra account to notes
payable and is subtracted from notes payable on the balance sheet. The journal entry
to amortize the discount would be: Debit interest expense Credit discount on notes
payable
16. A magazine outlet sells 64,000, 12-month subscriptions on account on March
1st. The subscription price is $15 each. The subscriptions start on April 1st. What
is the journal entry on March 1st?
• a. debit unearned subscription revenue for $960,000.
• b. debit prepaid subscriptions for $960,000.
• c. credit cash for $960,000.
• d. credit unearned subscription revenue for $960,000.
Correct Answer:
d. credit unearned subscription revenue for $960,000. ($960,000= $15 x 64,000
subscriptions)
, • d. for Lawsuit A only.
Correct Answer:
d. for Lawsuit A only. Lawsuit A is probable, and the amount can be reasonably
estimated, and the event occurred in year 1. A liability is recorded/accrued with note
disclosure. Lawsuit B is probable, and the event occurred in year 1, however, its
amount cannot be reasonably estimated. Note disclosure is only made. If the amount
of Lawsuit B can be reasonably estimated, then a liability would be recorded with note
disclosure. If both Lawsuits meet only one of the two criteria (probable or reasonably
estimated), only note disclosure is made.
23. A company is a defendant in a lawsuit and there is a 90% chance that the
company will lose the lawsuit. Estimates of loss range from $5 million to $20
million, and possibly as much as $30 million. None of the estimates are more
likely than the others. What amount of liability is accrued?
Correct Answer:
$5 million. If the company had to pay more than the $5 million, the difference
between the final amount and the $5 million is treated as a change in accounting
estimate. The additional loss would be recognized in future periods.
Accounting Rule: if there is one value from a range of values that is more likely than
the others, that amount is recorded/accrued. If there is no one value more likely than
the others, record/accrue the lowest amount in the range.
24. A company reported the following accounts from its year-end balance sheet:
Cash: $50,000 Short-term investments: $125,000 Accounts receivable: $230,000
Inventory: $720,000 Property, plant, and equipment, net: $800,000 Investments:
$95,000 Accounts payable: $193,000 Accrued liabilities: $29,000 Current portion
of long-term debt: $170,000 Long-term debt: $715,000 Stockholder's equity:
$963,000 Which is closest to the company's quick ratio?
• a. 0.5
• b. 1.0
• c. 2.5
• d. 2.9
Correct Answer:
b. 1.0 ($50,000 + $125,000 + $230,000) / ($193,000 + $29,000 + $170,000)
Accounting Rule: the quick ratio, also known as the acid-test is a liquidity ratio that
measures the ability of a company to pay its short-term liabilities by having assets that
, called an "anti-dilution provision." It gives the investor the option of maintaining a
certain percentage of ownership of the company as it grows.
31. A company's balance sheet displays common stock of $150,000, preferred
stock of $50,000, additional paid-in capital from common stock of $100,000 and
retained earnings of $80,000. Which amount represents stockholders' equity?
• a. $100,000
• b. $300,000
• c. $330,000
• d. $380,000
Correct Answer:
d. $380,000
Accounting Rule: stockholders' equity is comprised of a. Capital stock - common
stock and preferred stock. b. Additional paid-in capital. c. Retained earnings. d.
Treasury stock as a contra account.
32. When stock traded on an active exchange is issued for a machine:
• a. no entry is recorded until restrictions are lifted.
• b. the asset is recorded for the fair value of the stock.
• c. the asset is recorded for the appraised value of the machine.
• d. paid-in capital is increased by the appraised value of the machine.
Correct Answer:
b. the asset is recorded for the fair value of the stock.
Accounting Rule: accounting for the issuance of shares of stock for property or
services involves an issue of valuation. The general rule is companies should record
stock issued for services or property other than cash at either the fair value of the
stock issued, or the fair value of the noncash consideration received, whichever is
more clearly and readily determinable. When the stock is actively traded on an
organized stock exchange, the market value of the stock is the best evidence of
value.
33. A company exchanges 20,000 shares of its $10 par value for land. 1) What is
the journal entry to record this exchange if the fair value of the stock is $13 and
the fair value of the land is unknown? 2) What is the journal entry to record this
exchange if the fair value of the stock is unknown and the fair value of the land is
$280,000?
, • a. decreased total stockholders' equity.
• b. increased total stockholders' equity.
• c. did not change total stockholders' equity.
• d. decreased the number of issued shares.
Correct Answer:
a. decreased total stockholders' equity.
Accounting Rule: treasury stock is a contra equity account recorded in the
shareholder's equity section of the balance sheet. Because treasury stock represents
the number of shares repurchased, it reduces shareholder's equity by the amount
paid for the stock. Treasury stocks are shares that were originally part of "shares
outstanding" but have been repurchased by the company.
39. A company declares a cash dividend on May 1, the date of record is May 15,
and the date of payment is June 11. The dividend is $3.00 per share. The company
only has common stock, and there are 10,000 shares authorized, 8,000 shares
issued, and 5,000 shares outstanding. Which account should be debited on June
11?
• a. dividends payable for $15,000.
• b. retained earnings for $15,000.
• c. retained earnings for $24,000.
• d. dividends payable for $24,000.
Correct Answer:
a. dividends payable for $15,000.
Accounting Rule: dividends Payable is debited when the dividend is paid. The
dividend per share is multiplied by the number of shares outstanding. The journal
entries are At date of declaration (May 1) Debit retained earnings 15,000 Credit
dividends payable 15,000 At date of record (May 15) No entry At date of payment
(June 11) Debit dividends payable 15,000 Credit cash 15,000
40. A company announces a $500,000 dividend payable to common stockholders.
The cash dividend announcements noted that stockholders should consider
$400,000 of the dividend as income and the remainder as a return of capital.
Which journal entry should be used to record this dividend?
• a. debit retained earnings for $500,000; credit paid-in capital in excess of par
- common stock for $100,000; credit dividends payable for $400,000.
, Correct Answer:
a. non-existent. No journal entry is required on the date of record.
47. All of the following decreases retained earnings except
• a. a property dividend.
• b. a stock dividend.
• c. a cash dividend.
• d. a liquidating dividend.
Correct Answer:
d. a liquidating dividend.
48. When a property dividend is declared, the reduction in retained earnings is for
• a. the book value of the property on the date of declaration.
• b. the book value of the property on the date of distribution.
• c. the fair value of the property on the date of distribution.
• d. the fair value of the property on the date of declaration.
Correct Answer:
d. the fair value of the property on the date of declaration.
49. A company has 10,000 shares of $6 par value common stock outstanding. The
market value of the stock is $10. What is the impact of a 2-for-1 stock split?
• a. retained earnings is reduced by $100,000.
• b. par value of the stock is reduced to $3 per share.
• c. the number of shares of stock outstanding is reduced to 5,000.
• d. paid-in capital in excess of par value - common stock is reduced by $30,000.-
Correct Answer:
b. par value of the stock is reduced to $3 per share.
Accounting Rule: a stock split results in an increase or decrease in the number of
shares outstanding with a corresponding decrease or increase in the par or stated
value per share. In general, no accounting entry is required for a stock split as the
total dollar amount of all stockholders' equity accounts remains unchanged.
50. On February 1, a corporation has 40,000 shares of $1 par value common stock
issued and outstanding. The corporation also has Additional Paid-in Capital of
$200,000 and Retained Earnings of $200,000. On February 1, the corporation
Intermediate Accounting II
OA2 (Units 4-6)
Actual Questions with Verified Answers
Pass the Exam with Confidence
What You Will Get:
➢60 OA Exam Questions w/ Answers
➢Complete Units 4, 5, and 6
➢Accounting Rule Included
Take and pass the OA :)
, Preview Pages Below
Get the Complete PDF After Purchase
"If you require further clarification or in need of any study resources,
feel free to Message me."
Digital preview sample - complete document available after purchase
,1. A company owns a machine that it purchased on January 1, year 1 for $600,000.
The machine has an estimated useful life of 5 years and an estimated salvage
value of $75,000. The company uses the sum-of-the-years'-digits method. What is
the depreciation expense for each year and book value of the machine at the end
of year 5? Year 1: ($600,000 - $75,000) x 5/15 = $175,000 Year 2: ($600,000 -
$75,000) x 4/15 = $140,000 Year 3: ($600,000 - $75,000) x 3/15 = $105,000 Year 4
Correct Answer:
$(600,000 - $75,000) x 2/15 = $70,000 Year 5: ($600,000 - $75,000) x 1/15 = $35,000
Total accumulated depreciation $525,000 = ($175,000 + $140,000 + $105,000+
$70,000 + $35,000) Book value of the machine at the end of year 5 is its salvage
$75,000 = $600,000 - $525,000
Accounting Rule: the sum-of-the-years'-digits method is an accelerated depreciation
method resulting in higher deprecation cost in the earlier years and lower charges in
later periods. It is a passage of time depreciation method that results in a decreasing
depreciation charge based on a decreasing fraction of depreciable cost (original cost
less salvage value). Each fraction uses the sum of the years as a denominator (e.g. 5
+ 4 + 3 + 2 + 1 = 15). The numerator is the number of years of estimated life
remaining as of the beginning of the year. In this method, the numerator decreases
year by year, and the denominator remains constant (e.g. 5/15, 4/15, 3/15, 2/15, and
1/15). At the end of the asset's useful life, the balance remaining should equal the
salvage value. Never depreciate beyond an asset's salvage value.
2. A company purchased a truck at the beginning of 2020 for $109,200. The truck
is estimated to have a salvage value of $4,200 and a useful life of 120,000 miles. It
was driven 21,000 miles in 2020 and 29,000 miles in 2021. What is the depreciation
expense for 2020 and 2021 using the variable charge method? Year 2020: $18,375
Year 2021
Correct Answer:
$25,375 Formula: ( (Cost - Salvage Value) × Current Miles)/ Total Estimated Miles
Year 2020: (($109,200 - $4,200) × 21,000)/ 120,000 = $18,375 Year 2021: (($109,200
- $4,200) × 29,000)/ 120,000 = $25,375
Accounting Rule: The activity method (also called the variable-charge or units-of-
activity/production approach) assumes that depreciation is a function of use or
, productivity, instead of the passage of time. It calculates depreciation based on the
asset's activity such as the number of units produced or the number of hours/miles the
asset is used during the period. In other words, this method focuses on the actual use
of the asset rather than the passage of time. The amount of depreciation expense is
directly proportional to the amount of the asset's usage. The activity rate is multiplied
by the depreciable cost (original cost less salvage value). Another formula is: (Actual
Activity in Period/Total Estimate Activity) x (Cost - Salvage Value)
3. Equipment with a cost of $450,000 has an estimated salvage value of $30,000
and an estimated life of 4 years or 10,000 hours. It is to be depreciated by the
units-of-activity method. What is the amount of depreciation for the first full year,
during which the equipment was used 2,700 hours?
Correct Answer:
$113,400 $113,400 = (2,,000) x ($450,000 - $30,000)
Accounting Rule: (Actual Activity in Period/Total Estimate Activity) x (Cost - Salvage
Value)
4. 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 Useful life 5 years What amount of annual depreciation expense should
be recorded in the first and second years using double-declining balance method,
and what is the machine's book value for each of the years? Year 1: $90,000
depreciation expense $135,000 book value Year 2
Correct Answer:
$54,000 depreciation expense $81,000 book value
Accounting Rule: the double-declining balance (DDB) method is an accelerated
depreciation that records larger depreciation expenses during the earlier years of an
asset's useful life, and smaller ones in later years. First, divide 100% by the number of
years in the asset's useful life, this is the straight-line depreciation rate. Then, multiply
that number by 2 and that is the double-declining depreciation rate. Multiply that rate
by the asset's book value in each year. Depreciation continues until the asset's value
declines to its salvage value.
5. The activity method of depreciation:
• a. Is a variable charge approach.
• b. Assumes that depreciation is a function of the passage of time.
• c. Conceptually associates cost in terms of input measures.
,9. A company has a policy of calculating depreciation using the nearest fraction
of a year policy. On May 10, the company purchased and placed in service an
asset costing $50,000 with a five-year useful life. The Company uses the straight-
line depreciation method. What fraction is used to calculate the depreciation
expense on December 31 and what is the depreciation expense on December 31?
(round your answer to a whole number)
Correct Answer:
$6,392 $6,392 = (7.67/12) x ($50,000/5)
Accounting Rule: the nearest fraction of a year policy states that the depreciation
expense is prorated at the time the asset is placed in service You need to know the
various fractional-year policies (shown in the attached image)
10. A company purchases an asset on April 5 of the current year. The company
would like to use the depreciation policy that will result in the highest
depreciation expense in the last year of the asset's useful life. Which depreciation
policy should be used?
• a. nearest full month.
• b. half-year convention.
• c. nearest fraction of the year.
• d. full year in period of disposal.
Correct Answer:
d. full year in period of disposal. You need to know the various fractional-year policies
(shown in the attached image.)
11. When depreciation is computed for partial periods under a decreasing charge
depreciation method, it is necessary to:
• a. charge a full year's depreciation to the year of acquisition.
• b. determine depreciation expense for the full year and then prorate the
expense between the two periods involved.
• c. use the straight-line method for the year in which the asset is sold or
otherwise disposed of.
• d. use a salvage value equal to the first year's partial depreciation charge.
, Correct Answer:
1) debit cash 100,000 credit notes payable 100,000 2) debit notes payable 100,000
debit interest expense 2,000* credit cash 102,000 For question 2, the interest
expense equals. ($100,000 x 6%) x 4/12 Interest is calculated on an annual basis.
15. On March 1, 2020, a company borrows money from its bank. The company
signs a $102,000, zero-interest-bearing, four-month note. The present value of the
note is $100,000. The company has a calendar year end and prepares financial
statements annually. What is the journal entry the company records for issuance
of the note?
Correct Answer:
debit cash 100,000 debit discount on notes payable 2,000 credit notes payable
102,000
Accounting Rule: a zero-interest-bearing note does not explicitly state an interest
rate on the face of the note. However, interest is still charged. At maturity, the
borrower must pay back an amount greater than the cash received at the issuance
date. In other words, the borrower receives in cash the present value of the note. The
present value equals the face value of the note at maturity minus the interest or
discount charged by the lender for the term of the note. The bank takes its fee "up
front" rather than on the date the note matures. The note is always credited for is face
value at the time of issuance which is more than the cash received. The discount on
notes payable is the difference between the cash received and the face value of the
note. It represents the cost of borrowing and represents interest expense that will be
charged to future periods. The discount on notes payable is a contra account to notes
payable and is subtracted from notes payable on the balance sheet. The journal entry
to amortize the discount would be: Debit interest expense Credit discount on notes
payable
16. A magazine outlet sells 64,000, 12-month subscriptions on account on March
1st. The subscription price is $15 each. The subscriptions start on April 1st. What
is the journal entry on March 1st?
• a. debit unearned subscription revenue for $960,000.
• b. debit prepaid subscriptions for $960,000.
• c. credit cash for $960,000.
• d. credit unearned subscription revenue for $960,000.
Correct Answer:
d. credit unearned subscription revenue for $960,000. ($960,000= $15 x 64,000
subscriptions)
, • d. for Lawsuit A only.
Correct Answer:
d. for Lawsuit A only. Lawsuit A is probable, and the amount can be reasonably
estimated, and the event occurred in year 1. A liability is recorded/accrued with note
disclosure. Lawsuit B is probable, and the event occurred in year 1, however, its
amount cannot be reasonably estimated. Note disclosure is only made. If the amount
of Lawsuit B can be reasonably estimated, then a liability would be recorded with note
disclosure. If both Lawsuits meet only one of the two criteria (probable or reasonably
estimated), only note disclosure is made.
23. A company is a defendant in a lawsuit and there is a 90% chance that the
company will lose the lawsuit. Estimates of loss range from $5 million to $20
million, and possibly as much as $30 million. None of the estimates are more
likely than the others. What amount of liability is accrued?
Correct Answer:
$5 million. If the company had to pay more than the $5 million, the difference
between the final amount and the $5 million is treated as a change in accounting
estimate. The additional loss would be recognized in future periods.
Accounting Rule: if there is one value from a range of values that is more likely than
the others, that amount is recorded/accrued. If there is no one value more likely than
the others, record/accrue the lowest amount in the range.
24. A company reported the following accounts from its year-end balance sheet:
Cash: $50,000 Short-term investments: $125,000 Accounts receivable: $230,000
Inventory: $720,000 Property, plant, and equipment, net: $800,000 Investments:
$95,000 Accounts payable: $193,000 Accrued liabilities: $29,000 Current portion
of long-term debt: $170,000 Long-term debt: $715,000 Stockholder's equity:
$963,000 Which is closest to the company's quick ratio?
• a. 0.5
• b. 1.0
• c. 2.5
• d. 2.9
Correct Answer:
b. 1.0 ($50,000 + $125,000 + $230,000) / ($193,000 + $29,000 + $170,000)
Accounting Rule: the quick ratio, also known as the acid-test is a liquidity ratio that
measures the ability of a company to pay its short-term liabilities by having assets that
, called an "anti-dilution provision." It gives the investor the option of maintaining a
certain percentage of ownership of the company as it grows.
31. A company's balance sheet displays common stock of $150,000, preferred
stock of $50,000, additional paid-in capital from common stock of $100,000 and
retained earnings of $80,000. Which amount represents stockholders' equity?
• a. $100,000
• b. $300,000
• c. $330,000
• d. $380,000
Correct Answer:
d. $380,000
Accounting Rule: stockholders' equity is comprised of a. Capital stock - common
stock and preferred stock. b. Additional paid-in capital. c. Retained earnings. d.
Treasury stock as a contra account.
32. When stock traded on an active exchange is issued for a machine:
• a. no entry is recorded until restrictions are lifted.
• b. the asset is recorded for the fair value of the stock.
• c. the asset is recorded for the appraised value of the machine.
• d. paid-in capital is increased by the appraised value of the machine.
Correct Answer:
b. the asset is recorded for the fair value of the stock.
Accounting Rule: accounting for the issuance of shares of stock for property or
services involves an issue of valuation. The general rule is companies should record
stock issued for services or property other than cash at either the fair value of the
stock issued, or the fair value of the noncash consideration received, whichever is
more clearly and readily determinable. When the stock is actively traded on an
organized stock exchange, the market value of the stock is the best evidence of
value.
33. A company exchanges 20,000 shares of its $10 par value for land. 1) What is
the journal entry to record this exchange if the fair value of the stock is $13 and
the fair value of the land is unknown? 2) What is the journal entry to record this
exchange if the fair value of the stock is unknown and the fair value of the land is
$280,000?
, • a. decreased total stockholders' equity.
• b. increased total stockholders' equity.
• c. did not change total stockholders' equity.
• d. decreased the number of issued shares.
Correct Answer:
a. decreased total stockholders' equity.
Accounting Rule: treasury stock is a contra equity account recorded in the
shareholder's equity section of the balance sheet. Because treasury stock represents
the number of shares repurchased, it reduces shareholder's equity by the amount
paid for the stock. Treasury stocks are shares that were originally part of "shares
outstanding" but have been repurchased by the company.
39. A company declares a cash dividend on May 1, the date of record is May 15,
and the date of payment is June 11. The dividend is $3.00 per share. The company
only has common stock, and there are 10,000 shares authorized, 8,000 shares
issued, and 5,000 shares outstanding. Which account should be debited on June
11?
• a. dividends payable for $15,000.
• b. retained earnings for $15,000.
• c. retained earnings for $24,000.
• d. dividends payable for $24,000.
Correct Answer:
a. dividends payable for $15,000.
Accounting Rule: dividends Payable is debited when the dividend is paid. The
dividend per share is multiplied by the number of shares outstanding. The journal
entries are At date of declaration (May 1) Debit retained earnings 15,000 Credit
dividends payable 15,000 At date of record (May 15) No entry At date of payment
(June 11) Debit dividends payable 15,000 Credit cash 15,000
40. A company announces a $500,000 dividend payable to common stockholders.
The cash dividend announcements noted that stockholders should consider
$400,000 of the dividend as income and the remainder as a return of capital.
Which journal entry should be used to record this dividend?
• a. debit retained earnings for $500,000; credit paid-in capital in excess of par
- common stock for $100,000; credit dividends payable for $400,000.
, Correct Answer:
a. non-existent. No journal entry is required on the date of record.
47. All of the following decreases retained earnings except
• a. a property dividend.
• b. a stock dividend.
• c. a cash dividend.
• d. a liquidating dividend.
Correct Answer:
d. a liquidating dividend.
48. When a property dividend is declared, the reduction in retained earnings is for
• a. the book value of the property on the date of declaration.
• b. the book value of the property on the date of distribution.
• c. the fair value of the property on the date of distribution.
• d. the fair value of the property on the date of declaration.
Correct Answer:
d. the fair value of the property on the date of declaration.
49. A company has 10,000 shares of $6 par value common stock outstanding. The
market value of the stock is $10. What is the impact of a 2-for-1 stock split?
• a. retained earnings is reduced by $100,000.
• b. par value of the stock is reduced to $3 per share.
• c. the number of shares of stock outstanding is reduced to 5,000.
• d. paid-in capital in excess of par value - common stock is reduced by $30,000.-
Correct Answer:
b. par value of the stock is reduced to $3 per share.
Accounting Rule: a stock split results in an increase or decrease in the number of
shares outstanding with a corresponding decrease or increase in the par or stated
value per share. In general, no accounting entry is required for a stock split as the
total dollar amount of all stockholders' equity accounts remains unchanged.
50. On February 1, a corporation has 40,000 shares of $1 par value common stock
issued and outstanding. The corporation also has Additional Paid-in Capital of
$200,000 and Retained Earnings of $200,000. On February 1, the corporation
