WGU D105 OA2 (UNITS 5–9) PRACTICE
EXAM QUESTIONS AND ANSWERS
1. On January 1, 2023, Alpha Corp issued $1,000,000 of 8% bonds at 97. The bonds pay
interest annually and have a 5-year term. Alpha uses the effective interest method. If the
market rate is 8.75%, what is the interest expense for the first year?
A. $80,000
B. $87,500
C. $77,600
D. $84,875
Answer: D
Conceptual Explanation: Interest expense is calculated by multiplying the carrying value
($1,000,000 * 0.97 = $970,000) by the market rate (8.75%). $970,000 * 0.0875 = $84,875.
2. Under the 5-step model for revenue recognition, when is a performance obligation
considered ‘distinct’?
A. Only when the customer can benefit from the good or service on its own.
B. When the entity regularly sells the good or service to other customers.
,C. When the good or service is capable of being distinct and is separately identifiable from
other promises in the contract.
D. When the contract is signed by both parties and the transaction price is fixed.
Answer: C
Conceptual Explanation: A performance obligation is distinct if the customer can benefit
from it (capable) and the promise to transfer it is separately identifiable from other
promises (distinct within the context of the contract).
3. Delta Inc. reacquired 10,000 shares of its $10 par value common stock for $25 per share. It
later resold 5,000 of these shares for $30 per share. Using the cost method, what is the effect
on Paid-in Capital from Treasury Stock?
A. No effect
B. Increase of $50,000
C. Decrease of $25,000
D. Increase of $25,000
Answer: D
Conceptual Explanation: The gain on resale is ($30 - $25) * 5,000 = $25,000. Under the
cost method, gains from treasury stock transactions are credited to Paid-in Capital from
Treasury Stock.
, 4. Which of the following would result in a Deferred Tax Liability (DTL)?
A. Estimated warranty costs accrued for financial reporting but deductible when paid for
tax.
B. Subscription revenue received in advance, taxable now but recognized as revenue later
for financial reporting.
C. Prepaid insurance deducted for tax purposes in the current year but recognized as an
expense later for financial reporting.
D. Operating loss carryforwards.
Answer: C
Conceptual Explanation: A DTL arises when taxable income is lower than book income in
the current period due to a temporary difference that will result in higher taxable amounts
in the future (e.g., deducting prepayments now).
5. In a defined benefit pension plan, which component of pension expense is intended to
reflect the increase in the PBO due to the passage of time?
A. Service Cost
B. Amortization of Prior Service Cost
C. Expected Return on Plan Assets
D. Interest Cost
Answer: D
EXAM QUESTIONS AND ANSWERS
1. On January 1, 2023, Alpha Corp issued $1,000,000 of 8% bonds at 97. The bonds pay
interest annually and have a 5-year term. Alpha uses the effective interest method. If the
market rate is 8.75%, what is the interest expense for the first year?
A. $80,000
B. $87,500
C. $77,600
D. $84,875
Answer: D
Conceptual Explanation: Interest expense is calculated by multiplying the carrying value
($1,000,000 * 0.97 = $970,000) by the market rate (8.75%). $970,000 * 0.0875 = $84,875.
2. Under the 5-step model for revenue recognition, when is a performance obligation
considered ‘distinct’?
A. Only when the customer can benefit from the good or service on its own.
B. When the entity regularly sells the good or service to other customers.
,C. When the good or service is capable of being distinct and is separately identifiable from
other promises in the contract.
D. When the contract is signed by both parties and the transaction price is fixed.
Answer: C
Conceptual Explanation: A performance obligation is distinct if the customer can benefit
from it (capable) and the promise to transfer it is separately identifiable from other
promises (distinct within the context of the contract).
3. Delta Inc. reacquired 10,000 shares of its $10 par value common stock for $25 per share. It
later resold 5,000 of these shares for $30 per share. Using the cost method, what is the effect
on Paid-in Capital from Treasury Stock?
A. No effect
B. Increase of $50,000
C. Decrease of $25,000
D. Increase of $25,000
Answer: D
Conceptual Explanation: The gain on resale is ($30 - $25) * 5,000 = $25,000. Under the
cost method, gains from treasury stock transactions are credited to Paid-in Capital from
Treasury Stock.
, 4. Which of the following would result in a Deferred Tax Liability (DTL)?
A. Estimated warranty costs accrued for financial reporting but deductible when paid for
tax.
B. Subscription revenue received in advance, taxable now but recognized as revenue later
for financial reporting.
C. Prepaid insurance deducted for tax purposes in the current year but recognized as an
expense later for financial reporting.
D. Operating loss carryforwards.
Answer: C
Conceptual Explanation: A DTL arises when taxable income is lower than book income in
the current period due to a temporary difference that will result in higher taxable amounts
in the future (e.g., deducting prepayments now).
5. In a defined benefit pension plan, which component of pension expense is intended to
reflect the increase in the PBO due to the passage of time?
A. Service Cost
B. Amortization of Prior Service Cost
C. Expected Return on Plan Assets
D. Interest Cost
Answer: D
