WGU D105 OA2 (UNITS 5–9)
COMPREHENSIVE EXAM QUESTIONS
AND ANSWERS
1. A company is involved in a lawsuit and legal counsel advises it is probable the company will
lose, with a range of loss estimated between $500,000 and $1,200,000. Under GAAP, what
amount should be accrued?
A. $500,000
B. $850,000
C. $1,200,000
D. No accrual is required until a final judgment is rendered.
Answer: A
Conceptual Explanation: Under GAAP, if a loss contingency is probable and a range is
given where no amount within the range is a better estimate than any other, the minimum
amount in the range ($500,000) should be accrued.
2. On January 1, Year 1, a firm issued $1,000,000 of 8% bonds for $920,000. The bonds pay
interest annually and have an effective interest rate of 10%. Using the effective-interest
method, what is the interest expense for Year 1?
A. $92,000
,B. $80,000
C. $100,000
D. $73,600
Answer: A
Conceptual Explanation: Interest expense is calculated as the carrying value at the
beginning of the period multiplied by the effective rate: $920,000 * 10% = $92,000.
3. A company reacquires 1,000 shares of its $10 par value common stock at $25 per share
using the cost method. What is the effect on Total Stockholders’ Equity?
A. Decrease of $25,000
B. Decrease of $10,000
C. Increase of $25,000
D. No effect on total equity.
Answer: A
Conceptual Explanation: Under the cost method, treasury stock is a contra-equity
account. The purchase decreases total equity by the cost of the shares: 1,000 * $25 =
$25,000.
4. In a small stock dividend (less than 20-25%), what value is used to record the dividend’s
transfer from Retained Earnings?
A. Par value of the stock
, B. Book value of the stock
C. Market value of the stock
D. Stated value of the stock
Answer: C
Conceptual Explanation: For a small stock dividend, GAAP requires that the fair market
value of the shares at the date of declaration be transferred from Retained Earnings.
5. When calculating Diluted EPS, which method is used to account for stock options and
warrants?
A. The If-Converted Method
B. The Weighted Average Method
C. The Treasury Stock Method
D. The Contingent Share Method
Answer: C
Conceptual Explanation: The Treasury Stock Method assumes that the proceeds from the
exercise of options/warrants are used to repurchase shares at the average market price,
which determines the net increase in shares.
6. Which of the following creates a Deferred Tax Liability?
A. Accrued warranty costs deductible for tax when paid.
B. Revenue received in advance that is taxable when received.
COMPREHENSIVE EXAM QUESTIONS
AND ANSWERS
1. A company is involved in a lawsuit and legal counsel advises it is probable the company will
lose, with a range of loss estimated between $500,000 and $1,200,000. Under GAAP, what
amount should be accrued?
A. $500,000
B. $850,000
C. $1,200,000
D. No accrual is required until a final judgment is rendered.
Answer: A
Conceptual Explanation: Under GAAP, if a loss contingency is probable and a range is
given where no amount within the range is a better estimate than any other, the minimum
amount in the range ($500,000) should be accrued.
2. On January 1, Year 1, a firm issued $1,000,000 of 8% bonds for $920,000. The bonds pay
interest annually and have an effective interest rate of 10%. Using the effective-interest
method, what is the interest expense for Year 1?
A. $92,000
,B. $80,000
C. $100,000
D. $73,600
Answer: A
Conceptual Explanation: Interest expense is calculated as the carrying value at the
beginning of the period multiplied by the effective rate: $920,000 * 10% = $92,000.
3. A company reacquires 1,000 shares of its $10 par value common stock at $25 per share
using the cost method. What is the effect on Total Stockholders’ Equity?
A. Decrease of $25,000
B. Decrease of $10,000
C. Increase of $25,000
D. No effect on total equity.
Answer: A
Conceptual Explanation: Under the cost method, treasury stock is a contra-equity
account. The purchase decreases total equity by the cost of the shares: 1,000 * $25 =
$25,000.
4. In a small stock dividend (less than 20-25%), what value is used to record the dividend’s
transfer from Retained Earnings?
A. Par value of the stock
, B. Book value of the stock
C. Market value of the stock
D. Stated value of the stock
Answer: C
Conceptual Explanation: For a small stock dividend, GAAP requires that the fair market
value of the shares at the date of declaration be transferred from Retained Earnings.
5. When calculating Diluted EPS, which method is used to account for stock options and
warrants?
A. The If-Converted Method
B. The Weighted Average Method
C. The Treasury Stock Method
D. The Contingent Share Method
Answer: C
Conceptual Explanation: The Treasury Stock Method assumes that the proceeds from the
exercise of options/warrants are used to repurchase shares at the average market price,
which determines the net increase in shares.
6. Which of the following creates a Deferred Tax Liability?
A. Accrued warranty costs deductible for tax when paid.
B. Revenue received in advance that is taxable when received.
