ACCT 304 TOPIC EXAMS QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. A company changes its estimate of expected credit losses because newly available customer-default
data alter management's expectations. How is the effect generally accounted for?
A. Directly as a correction of retained earnings regardless of cause
B. As a change in reporting entity
C. By restating all prior statements as though the new estimate had always been known
D. Prospectively as a change in estimate in the period of change and, when applicable, future periods
Correct Answer: D. Prospectively as a change in estimate in the period of change and, when applicable,
future periods
Explanation: Changes in estimates arise from new information or experience and are generally recognized
prospectively. They are not prior-period errors merely because the estimate differs from an earlier
expectation.
2. A one-year note has a $500,000 face amount but the borrower receives only $470,000 at issuance and
makes no periodic interest payments. Which amount is the borrower's interest cost before considering
compounding?
A. $470,000
B. $30,000
C. $500,000
D. $0
Correct Answer: B. $30,000
Explanation: The $30,000 difference between the note's face amount due at maturity and the $470,000 cash
proceeds is the discount and represents interest cost over the note's term.
3. At lease commencement, a lessee measures a lease liability at $900,000, prepays $25,000 of rent,
receives no incentives, and has no initial direct costs. What initial right-of-use asset is recognized?
A. $875,000
B. $25,000
C. $925,000
D. $900,000
Correct Answer: C. $925,000
Explanation: The initial ROU asset generally starts with the lease liability and is adjusted for items such as
prepaid lease payments, accrued payments, incentives, and qualifying initial direct costs. Here, $900,000 +
$25,000 = $925,000.
, 4. Which event normally decreases the projected benefit obligation of a defined benefit plan during the
year?
A. Benefits paid to retirees
B. Interest cost on the beginning PBO
C. An actuarial loss that increases expected benefits
D. Current-period service cost
Correct Answer: A. Benefits paid to retirees
Explanation: Benefits paid settle a portion of the obligation and therefore reduce the PBO. Service cost,
interest cost, and actuarial losses generally increase it, while actuarial gains can decrease it.
5. Under double-declining-balance depreciation, which base is multiplied by the accelerated rate at the
beginning of each year?
A. The current fair value of the asset
B. The asset's beginning-of-year book value, while ensuring depreciation does not reduce book value below
residual value
C. Original cost minus accumulated depreciation plus residual value
D. Only the residual value
Correct Answer: B. The asset's beginning-of-year book value, while ensuring depreciation does not reduce
book value below residual value
Explanation: The double-declining rate is applied to beginning book value rather than to a fixed depreciable
base. The method is constrained so the asset is not depreciated below its residual value.
6. Tax depreciation has exceeded book depreciation on equipment, leaving the tax basis below the book
carrying amount. Assuming future recovery of the asset is taxable, what deferred tax item generally
results?
A. A deferred tax asset
B. No deferred tax because depreciation is noncash
C. A permanent reduction of tax expense
D. A deferred tax liability
Correct Answer: D. A deferred tax liability
Explanation: A book carrying amount greater than tax basis for an asset generally creates a taxable
temporary difference. Future recovery produces taxable amounts, resulting in a deferred tax liability.
ANSWERS AND EXPLANATIONS
| American Public University
1. A company changes its estimate of expected credit losses because newly available customer-default
data alter management's expectations. How is the effect generally accounted for?
A. Directly as a correction of retained earnings regardless of cause
B. As a change in reporting entity
C. By restating all prior statements as though the new estimate had always been known
D. Prospectively as a change in estimate in the period of change and, when applicable, future periods
Correct Answer: D. Prospectively as a change in estimate in the period of change and, when applicable,
future periods
Explanation: Changes in estimates arise from new information or experience and are generally recognized
prospectively. They are not prior-period errors merely because the estimate differs from an earlier
expectation.
2. A one-year note has a $500,000 face amount but the borrower receives only $470,000 at issuance and
makes no periodic interest payments. Which amount is the borrower's interest cost before considering
compounding?
A. $470,000
B. $30,000
C. $500,000
D. $0
Correct Answer: B. $30,000
Explanation: The $30,000 difference between the note's face amount due at maturity and the $470,000 cash
proceeds is the discount and represents interest cost over the note's term.
3. At lease commencement, a lessee measures a lease liability at $900,000, prepays $25,000 of rent,
receives no incentives, and has no initial direct costs. What initial right-of-use asset is recognized?
A. $875,000
B. $25,000
C. $925,000
D. $900,000
Correct Answer: C. $925,000
Explanation: The initial ROU asset generally starts with the lease liability and is adjusted for items such as
prepaid lease payments, accrued payments, incentives, and qualifying initial direct costs. Here, $900,000 +
$25,000 = $925,000.
, 4. Which event normally decreases the projected benefit obligation of a defined benefit plan during the
year?
A. Benefits paid to retirees
B. Interest cost on the beginning PBO
C. An actuarial loss that increases expected benefits
D. Current-period service cost
Correct Answer: A. Benefits paid to retirees
Explanation: Benefits paid settle a portion of the obligation and therefore reduce the PBO. Service cost,
interest cost, and actuarial losses generally increase it, while actuarial gains can decrease it.
5. Under double-declining-balance depreciation, which base is multiplied by the accelerated rate at the
beginning of each year?
A. The current fair value of the asset
B. The asset's beginning-of-year book value, while ensuring depreciation does not reduce book value below
residual value
C. Original cost minus accumulated depreciation plus residual value
D. Only the residual value
Correct Answer: B. The asset's beginning-of-year book value, while ensuring depreciation does not reduce
book value below residual value
Explanation: The double-declining rate is applied to beginning book value rather than to a fixed depreciable
base. The method is constrained so the asset is not depreciated below its residual value.
6. Tax depreciation has exceeded book depreciation on equipment, leaving the tax basis below the book
carrying amount. Assuming future recovery of the asset is taxable, what deferred tax item generally
results?
A. A deferred tax asset
B. No deferred tax because depreciation is noncash
C. A permanent reduction of tax expense
D. A deferred tax liability
Correct Answer: D. A deferred tax liability
Explanation: A book carrying amount greater than tax basis for an asset generally creates a taxable
temporary difference. Future recovery produces taxable amounts, resulting in a deferred tax liability.
