ACCT 304 PRACTICE EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. A customer with strong financial condition at year-end suffers a catastrophic fire after year-end and
files for bankruptcy before the financial statements are issued. The fire created the customer's financial
distress. How is the event generally treated?
A. As a nonrecognized subsequent event that may require disclosure if material because the condition arose
after year-end
B. As an equity transaction
C. As an adjusting event proving the receivable was impaired at year-end
D. As current-year revenue
Correct Answer: A. As a nonrecognized subsequent event that may require disclosure if material because
the condition arose after year-end
Explanation: When the relevant condition arises after the balance-sheet date, the event is generally
nonrecognized. Material nonrecognized events may require disclosure so users understand their nature and
potential financial effect.
2. What is the purpose of a valuation allowance against deferred tax assets under U.S. GAAP?
A. To increase all deferred tax liabilities to fair value
B. To reduce deferred tax assets to the amount that is more likely than not to be realized
C. To defer current income tax payable until cash is available
D. To eliminate permanent differences from pretax income
Correct Answer: B. To reduce deferred tax assets to the amount that is more likely than not to be realized
Explanation: A valuation allowance is recognized when, based on available evidence, it is more likely than
not that some portion or all of a deferred tax asset will not be realized.
3. When a board legally declares a cash dividend on common stock, which immediate accounting effect
generally occurs on the declaration date?
A. Cash decreases immediately even if payment occurs later
B. Common stock is reduced by the dividend amount
C. Revenue is recognized because shareholders receive value
D. Retained earnings decreases and a dividend payable liability is recognized
Correct Answer: D. Retained earnings decreases and a dividend payable liability is recognized
Explanation: A declared cash dividend becomes an obligation on the declaration date. The entity reduces
retained earnings (or records dividends declared) and recognizes dividends payable; cash is reduced when
the dividend is paid.
, 4. A lessee elects the short-term lease accounting policy for an eligible class of underlying assets. What is
the principal balance-sheet effect for qualifying leases?
A. The lessee generally does not recognize an ROU asset or lease liability for those qualifying short-term
leases
B. The lessor becomes the lessee for accounting purposes
C. The lessee records a finance lease liability equal to the asset fair value
D. The lessee capitalizes all rent as inventory
Correct Answer: A. The lessee generally does not recognize an ROU asset or lease liability for those
qualifying short-term leases
Explanation: For qualifying leases with a term of 12 months or less and no purchase option reasonably
certain to be exercised, a lessee may elect the short-term exemption and generally recognize lease payments
as expense rather than recording an ROU asset and lease liability.
5. A calendar-year company issued a note on October 1 and pays interest each March 31 and September
30. At December 31, what principle determines the interest payable to accrue?
A. Only principal is accrued until the note matures
B. No interest is accrued because no cash payment is due until March
C. Interest is accrued for the three months since the most recent interest date, based on principal and the
effective/stated terms as applicable
D. A full six months of interest is accrued because payments are semiannual
Correct Answer: C. Interest is accrued for the three months since the most recent interest date, based on
principal and the effective/stated terms as applicable
Explanation: Accrual accounting recognizes interest expense and the related payable as time passes, even if
cash is not yet due. At December 31, three months have elapsed since the September 30 interest date.
6. Which obligation is most likely to be classified as current at year-end?
A. Common stock outstanding
B. A trade payable due in 30 days
C. A warranty obligation expected to be settled over the next ten years with no current portion
D. A bond principal amount contractually due in nine years
Correct Answer: B. A trade payable due in 30 days
Explanation: Trade payables due in the near term are current liabilities. Long-term debt due many years
later and long-duration obligations are generally noncurrent absent another specific classification
consideration.
ANSWERS AND EXPLANATIONS
| American Public University
1. A customer with strong financial condition at year-end suffers a catastrophic fire after year-end and
files for bankruptcy before the financial statements are issued. The fire created the customer's financial
distress. How is the event generally treated?
A. As a nonrecognized subsequent event that may require disclosure if material because the condition arose
after year-end
B. As an equity transaction
C. As an adjusting event proving the receivable was impaired at year-end
D. As current-year revenue
Correct Answer: A. As a nonrecognized subsequent event that may require disclosure if material because
the condition arose after year-end
Explanation: When the relevant condition arises after the balance-sheet date, the event is generally
nonrecognized. Material nonrecognized events may require disclosure so users understand their nature and
potential financial effect.
2. What is the purpose of a valuation allowance against deferred tax assets under U.S. GAAP?
A. To increase all deferred tax liabilities to fair value
B. To reduce deferred tax assets to the amount that is more likely than not to be realized
C. To defer current income tax payable until cash is available
D. To eliminate permanent differences from pretax income
Correct Answer: B. To reduce deferred tax assets to the amount that is more likely than not to be realized
Explanation: A valuation allowance is recognized when, based on available evidence, it is more likely than
not that some portion or all of a deferred tax asset will not be realized.
3. When a board legally declares a cash dividend on common stock, which immediate accounting effect
generally occurs on the declaration date?
A. Cash decreases immediately even if payment occurs later
B. Common stock is reduced by the dividend amount
C. Revenue is recognized because shareholders receive value
D. Retained earnings decreases and a dividend payable liability is recognized
Correct Answer: D. Retained earnings decreases and a dividend payable liability is recognized
Explanation: A declared cash dividend becomes an obligation on the declaration date. The entity reduces
retained earnings (or records dividends declared) and recognizes dividends payable; cash is reduced when
the dividend is paid.
, 4. A lessee elects the short-term lease accounting policy for an eligible class of underlying assets. What is
the principal balance-sheet effect for qualifying leases?
A. The lessee generally does not recognize an ROU asset or lease liability for those qualifying short-term
leases
B. The lessor becomes the lessee for accounting purposes
C. The lessee records a finance lease liability equal to the asset fair value
D. The lessee capitalizes all rent as inventory
Correct Answer: A. The lessee generally does not recognize an ROU asset or lease liability for those
qualifying short-term leases
Explanation: For qualifying leases with a term of 12 months or less and no purchase option reasonably
certain to be exercised, a lessee may elect the short-term exemption and generally recognize lease payments
as expense rather than recording an ROU asset and lease liability.
5. A calendar-year company issued a note on October 1 and pays interest each March 31 and September
30. At December 31, what principle determines the interest payable to accrue?
A. Only principal is accrued until the note matures
B. No interest is accrued because no cash payment is due until March
C. Interest is accrued for the three months since the most recent interest date, based on principal and the
effective/stated terms as applicable
D. A full six months of interest is accrued because payments are semiannual
Correct Answer: C. Interest is accrued for the three months since the most recent interest date, based on
principal and the effective/stated terms as applicable
Explanation: Accrual accounting recognizes interest expense and the related payable as time passes, even if
cash is not yet due. At December 31, three months have elapsed since the September 30 interest date.
6. Which obligation is most likely to be classified as current at year-end?
A. Common stock outstanding
B. A trade payable due in 30 days
C. A warranty obligation expected to be settled over the next ten years with no current portion
D. A bond principal amount contractually due in nine years
Correct Answer: B. A trade payable due in 30 days
Explanation: Trade payables due in the near term are current liabilities. Long-term debt due many years
later and long-duration obligations are generally noncurrent absent another specific classification
consideration.
