ACCT 304 FINAL EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Alder Systems acquires equipment by issuing a long-term note directly to the seller, with no cash
exchanged at acquisition. How should the transaction be treated in the statement of cash flows?
A. Report both an investing inflow and financing outflow
B. Report it as an operating outflow
C. Exclude it from cash-flow totals and disclose it as a significant noncash investing and financing activity
D. Ignore it entirely, including disclosures
Correct Answer: C. Exclude it from cash-flow totals and disclose it as a significant noncash investing and
financing activity
Explanation: Because no cash changes hands, the transaction is excluded from the statement's cash totals
but disclosed as a significant noncash investing and financing activity.
2. Yellowstone Supply has a taxable temporary difference of $1,025,000. The enacted tax rate expected at
reversal changes from 25% to 28% during the current period. By how much does the related deferred tax
liability increase, ignoring other changes?
A. $30,750
B. $256,250
C. $543,250
D. $287,000
Correct Answer: A. $30,750
Explanation: Deferred taxes are remeasured using enacted rates expected when temporary differences
reverse. The increase is $1,025,000 x (28% - 25%) = $30,750, recognized in the period of enactment through
the applicable income/OCI location.
3. Which classification best fits a debt security that management actively buys and sells principally to
profit from short-term price movements?
A. Available-for-sale solely because it pays interest
B. Trading
C. Equity method
D. Held-to-maturity
Correct Answer: B. Trading
Explanation: Debt securities acquired principally for near-term resale and short-term price gains are
classified as trading and are measured at fair value through earnings.
, 4. Quartz Manufacturing ships goods to a dealer on consignment. Quartz Manufacturing can require
return of the goods, retains control until sale to an end customer, and the dealer has no unconditional
obligation to pay before that sale. When should Quartz Manufacturing recognize product revenue?
A. When the consignment agreement is signed
B. When the goods are shipped to the dealer
C. When the dealer displays the goods
D. When the dealer sells the goods to an end customer and control transfers
Correct Answer: D. When the dealer sells the goods to an end customer and control transfers
Explanation: In a consignment arrangement, transfer to the consignee does not by itself transfer control.
Revenue is recognized when control ultimately transfers to the end customer or another qualifying event
occurs.
5. Which item can be reported in other comprehensive income rather than current net income under U.S.
GAAP?
A. Revenue from selling inventory
B. A noncredit unrealized holding gain on an available-for-sale debt security
C. Wages expense
D. Interest expense on bonds
Correct Answer: B. A noncredit unrealized holding gain on an available-for-sale debt security
Explanation: Certain specified items bypass net income and enter OCI, including noncredit unrealized gains
and losses on available-for-sale debt securities. Ordinary revenues and expenses remain in net income.
6. For a defined benefit plan of Willow Markets, how is the service cost component of net periodic
pension cost generally presented relative to the other components under U.S. GAAP?
A. All pension components must be presented in OCI only
B. Service cost is never included in net income
C. Service cost is presented in the same income-statement line(s) as other employee compensation costs,
while other net benefit cost components are presented separately outside operating income as required
D. All components must be netted into revenue
Correct Answer: C. Service cost is presented in the same income-statement line(s) as other employee
compensation costs, while other net benefit cost components are presented separately outside operating
income as required
Explanation: Current presentation guidance separates service cost from the other components of net
periodic benefit cost. Service cost follows the location of other compensation costs, while other components
are presented separately as required.
ANSWERS AND EXPLANATIONS
| American Public University
1. Alder Systems acquires equipment by issuing a long-term note directly to the seller, with no cash
exchanged at acquisition. How should the transaction be treated in the statement of cash flows?
A. Report both an investing inflow and financing outflow
B. Report it as an operating outflow
C. Exclude it from cash-flow totals and disclose it as a significant noncash investing and financing activity
D. Ignore it entirely, including disclosures
Correct Answer: C. Exclude it from cash-flow totals and disclose it as a significant noncash investing and
financing activity
Explanation: Because no cash changes hands, the transaction is excluded from the statement's cash totals
but disclosed as a significant noncash investing and financing activity.
2. Yellowstone Supply has a taxable temporary difference of $1,025,000. The enacted tax rate expected at
reversal changes from 25% to 28% during the current period. By how much does the related deferred tax
liability increase, ignoring other changes?
A. $30,750
B. $256,250
C. $543,250
D. $287,000
Correct Answer: A. $30,750
Explanation: Deferred taxes are remeasured using enacted rates expected when temporary differences
reverse. The increase is $1,025,000 x (28% - 25%) = $30,750, recognized in the period of enactment through
the applicable income/OCI location.
3. Which classification best fits a debt security that management actively buys and sells principally to
profit from short-term price movements?
A. Available-for-sale solely because it pays interest
B. Trading
C. Equity method
D. Held-to-maturity
Correct Answer: B. Trading
Explanation: Debt securities acquired principally for near-term resale and short-term price gains are
classified as trading and are measured at fair value through earnings.
, 4. Quartz Manufacturing ships goods to a dealer on consignment. Quartz Manufacturing can require
return of the goods, retains control until sale to an end customer, and the dealer has no unconditional
obligation to pay before that sale. When should Quartz Manufacturing recognize product revenue?
A. When the consignment agreement is signed
B. When the goods are shipped to the dealer
C. When the dealer displays the goods
D. When the dealer sells the goods to an end customer and control transfers
Correct Answer: D. When the dealer sells the goods to an end customer and control transfers
Explanation: In a consignment arrangement, transfer to the consignee does not by itself transfer control.
Revenue is recognized when control ultimately transfers to the end customer or another qualifying event
occurs.
5. Which item can be reported in other comprehensive income rather than current net income under U.S.
GAAP?
A. Revenue from selling inventory
B. A noncredit unrealized holding gain on an available-for-sale debt security
C. Wages expense
D. Interest expense on bonds
Correct Answer: B. A noncredit unrealized holding gain on an available-for-sale debt security
Explanation: Certain specified items bypass net income and enter OCI, including noncredit unrealized gains
and losses on available-for-sale debt securities. Ordinary revenues and expenses remain in net income.
6. For a defined benefit plan of Willow Markets, how is the service cost component of net periodic
pension cost generally presented relative to the other components under U.S. GAAP?
A. All pension components must be presented in OCI only
B. Service cost is never included in net income
C. Service cost is presented in the same income-statement line(s) as other employee compensation costs,
while other net benefit cost components are presented separately outside operating income as required
D. All components must be netted into revenue
Correct Answer: C. Service cost is presented in the same income-statement line(s) as other employee
compensation costs, while other net benefit cost components are presented separately outside operating
income as required
Explanation: Current presentation guidance separates service cost from the other components of net
periodic benefit cost. Service cost follows the location of other compensation costs, while other components
are presented separately as required.
