ACCT 305 MIDTERM EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. For a public entity such as Willow Corporation, where are basic and diluted earnings per share generally
presented?
A. Only in management's discussion and analysis
B. Only in the statement of cash flows
C. Only in the statement of stockholders' equity
D. On the face of the income statement for income from continuing operations and net income when applicable
Correct Answer: D. On the face of the income statement for income from continuing operations and net income
when applicable
Explanation: Public entities generally present basic and diluted EPS prominently with the income statement
information required by the EPS guidance, rather than relegating EPS solely to other statements or narrative disclosures.
2. Nimbus Corporation owns a marketable equity security that is not consolidated and is not accounted for under
the equity method. Under the general U.S. GAAP model, how are changes in fair value ordinarily reported?
A. In other comprehensive income until sale
B. They are ignored unless impairment is other than temporary
C. Only in retained earnings after dividends are received
D. In net income
Correct Answer: D. In net income
Explanation: Equity securities within the general measurement model are generally carried at fair value with changes in
fair value recognized in net income, subject to specific scope exceptions and the practicability exception for certain
nonmarketable investments.
3. At the start of the year, Pioneer Corporation's finance-lease liability is $360,000 and the effective annual
discount rate is 6%. What interest expense is recognized for the year before the lease payment, assuming annual
payments?
A. $60,000
B. $21,600
C. $18,000
D. $25,200
Correct Answer: B. $21,600
Explanation: For a finance lease, interest on the lease liability is calculated using the effective-interest method.
$360,000 x 6% = $21,600.
, 4. After year-end but before Juniper Corporation issues its financial statements, a 2-for-1 stock split occurs. How
should the split affect EPS presented for the prior year?
A. Only diluted EPS is adjusted; basic EPS is unchanged
B. Prior-period shares and EPS are adjusted retrospectively as if the split occurred at the beginning of the earliest
period presented
C. The split is ignored until the next reporting period
D. The split is treated as a current-period expense
Correct Answer: B. Prior-period shares and EPS are adjusted retrospectively as if the split occurred at the beginning
of the earliest period presented
Explanation: Stock splits and stock dividends require retrospective adjustment of the share amounts used in EPS for all
periods presented. This preserves comparability across periods.
5. Using the indirect method, Beacon Corporation's accounts receivable increased by $90,000 and accounts
payable increased by $40,000 during the year. Ignoring other adjustments, what is the net adjustment to net income
from these two working-capital changes?
A. $-50,000
B. $-40,000
C. $50,000
D. $130,000
Correct Answer: A. $-50,000
Explanation: An increase in accounts receivable is subtracted from net income, while an increase in accounts payable is
added. The net adjustment is -$90,000 + $40,000 = $-50,000.
6. On March 5, Granite Corporation's board declares a $90,000 cash dividend payable April 10 to shareholders of
record March 20. Which event creates the dividend liability?
A. The record date on March 20
B. The declaration on March 5
C. The first day the shares trade ex-dividend
D. The payment date on April 10
Correct Answer: B. The declaration on March 5
Explanation: A cash dividend becomes a liability when the board formally declares it. No journal entry is normally
made on the record date, and payment later reduces both cash and the dividend payable.
7. Beacon Corporation uses a derivative as a hedge of its net investment in a foreign operation and the hedge
qualifies for special accounting. Where is the effective hedge result generally reported?
A. As an extraordinary item
B. As treasury stock
C. In the foreign currency translation component of OCI
D. In cost of goods sold
Correct Answer: C. In the foreign currency translation component of OCI
Explanation: The effective portion of a qualifying net investment hedge is generally reported in OCI as part of the
cumulative translation adjustment framework.
ANSWERS AND EXPLANATIONS
| American Public University
1. For a public entity such as Willow Corporation, where are basic and diluted earnings per share generally
presented?
A. Only in management's discussion and analysis
B. Only in the statement of cash flows
C. Only in the statement of stockholders' equity
D. On the face of the income statement for income from continuing operations and net income when applicable
Correct Answer: D. On the face of the income statement for income from continuing operations and net income
when applicable
Explanation: Public entities generally present basic and diluted EPS prominently with the income statement
information required by the EPS guidance, rather than relegating EPS solely to other statements or narrative disclosures.
2. Nimbus Corporation owns a marketable equity security that is not consolidated and is not accounted for under
the equity method. Under the general U.S. GAAP model, how are changes in fair value ordinarily reported?
A. In other comprehensive income until sale
B. They are ignored unless impairment is other than temporary
C. Only in retained earnings after dividends are received
D. In net income
Correct Answer: D. In net income
Explanation: Equity securities within the general measurement model are generally carried at fair value with changes in
fair value recognized in net income, subject to specific scope exceptions and the practicability exception for certain
nonmarketable investments.
3. At the start of the year, Pioneer Corporation's finance-lease liability is $360,000 and the effective annual
discount rate is 6%. What interest expense is recognized for the year before the lease payment, assuming annual
payments?
A. $60,000
B. $21,600
C. $18,000
D. $25,200
Correct Answer: B. $21,600
Explanation: For a finance lease, interest on the lease liability is calculated using the effective-interest method.
$360,000 x 6% = $21,600.
, 4. After year-end but before Juniper Corporation issues its financial statements, a 2-for-1 stock split occurs. How
should the split affect EPS presented for the prior year?
A. Only diluted EPS is adjusted; basic EPS is unchanged
B. Prior-period shares and EPS are adjusted retrospectively as if the split occurred at the beginning of the earliest
period presented
C. The split is ignored until the next reporting period
D. The split is treated as a current-period expense
Correct Answer: B. Prior-period shares and EPS are adjusted retrospectively as if the split occurred at the beginning
of the earliest period presented
Explanation: Stock splits and stock dividends require retrospective adjustment of the share amounts used in EPS for all
periods presented. This preserves comparability across periods.
5. Using the indirect method, Beacon Corporation's accounts receivable increased by $90,000 and accounts
payable increased by $40,000 during the year. Ignoring other adjustments, what is the net adjustment to net income
from these two working-capital changes?
A. $-50,000
B. $-40,000
C. $50,000
D. $130,000
Correct Answer: A. $-50,000
Explanation: An increase in accounts receivable is subtracted from net income, while an increase in accounts payable is
added. The net adjustment is -$90,000 + $40,000 = $-50,000.
6. On March 5, Granite Corporation's board declares a $90,000 cash dividend payable April 10 to shareholders of
record March 20. Which event creates the dividend liability?
A. The record date on March 20
B. The declaration on March 5
C. The first day the shares trade ex-dividend
D. The payment date on April 10
Correct Answer: B. The declaration on March 5
Explanation: A cash dividend becomes a liability when the board formally declares it. No journal entry is normally
made on the record date, and payment later reduces both cash and the dividend payable.
7. Beacon Corporation uses a derivative as a hedge of its net investment in a foreign operation and the hedge
qualifies for special accounting. Where is the effective hedge result generally reported?
A. As an extraordinary item
B. As treasury stock
C. In the foreign currency translation component of OCI
D. In cost of goods sold
Correct Answer: C. In the foreign currency translation component of OCI
Explanation: The effective portion of a qualifying net investment hedge is generally reported in OCI as part of the
cumulative translation adjustment framework.
