ACCT 305 PRACTICE EXAM QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. A new Accounting Standards Update applies to Triton Corporation and includes explicit transition instructions
that differ from the general retrospective model in Topic 250. Which transition approach should Triton
Corporation follow?
A. Management's preferred method if disclosed
B. The transition method specified by the new standard
C. Always prospective application
D. Always full retrospective application regardless of the standard's instructions
Correct Answer: B. The transition method specified by the new standard
Explanation: Specific transition provisions in a newly issued accounting standard govern adoption. The general
accounting-change model applies when more specific authoritative transition guidance does not override it.
2. Orion Corporation has net income of $900,000, convertible preferred dividends of $60,000, 240,000
weighted-average common shares, and preferred shares convertible into 40,000 common shares. Assuming
conversion is dilutive and the preferred dividends are not tax-deductible, what is diluted EPS?
A. $3.21
B. $3.75
C. $3.00
D. $3.50
Correct Answer: A. $3.21
Explanation: Under the if-converted method, add back the convertible preferred dividends to the numerator and add the
conversion shares to the denominator. $900,,000 = $3.21.
3. What is the effect of Quartz Corporation's stock split on retained earnings?
A. Retained earnings is reduced by the fair value of new shares
B. Retained earnings is increased by par value
C. Retained earnings is eliminated
D. No change
Correct Answer: D. No change
Explanation: A stock split changes share count and par or stated value per share but does not transfer amounts out of
retained earnings or change total equity.
4. In measuring Summit Corporation's net periodic pension cost, what is the broad effect of the expected return on
plan assets?
A. It reduces net periodic pension cost
B. It is recognized as revenue from customers
C. It is added to service cost
D. It increases the PBO directly
Correct Answer: A. It reduces net periodic pension cost
Explanation: The expected return on plan assets is a component that reduces net periodic pension cost. Actual asset
performance affects plan assets and may create actuarial gains or losses relative to expectations.
, 5. Unity Corporation pays cash income taxes that are not specifically identifiable with an investing or financing
transaction. How are the payments generally classified under U.S. GAAP?
A. Noncash activities
B. Operating outflows
C. Investing outflows
D. Financing outflows
Correct Answer: B. Operating outflows
Explanation: Income taxes paid are generally operating cash flows under U.S. GAAP unless a specific portion can be
appropriately identified with an investing or financing transaction under the applicable guidance.
6. Why is a liability-classified share-based award of Beacon Corporation more sensitive to later stock-price
changes than an otherwise similar equity-classified award?
A. Because equity awards are remeasured daily and liability awards are fixed
B. Because the liability award is remeasured to fair value through settlement
C. Because equity awards always settle in cash
D. Because liability awards are never expensed
Correct Answer: B. Because the liability award is remeasured to fair value through settlement
Explanation: Liability-classified awards are remeasured at each reporting date until settlement, so later changes in share
price can change compensation cost. Equity-classified awards are generally fixed at grant-date fair value for
measurement purposes.
7. Meridian Corporation issued bonds at a discount and has used the effective-interest method correctly for several
years. If the bonds are held to maturity with no modification, what should happen to their carrying amount as
maturity approaches?
A. It should decrease toward zero
B. It should increase toward the face value
C. It should fluctuate with market value each reporting period
D. It should remain at the original issue price
Correct Answer: B. It should increase toward the face value
Explanation: Effective-interest amortization of a discount increases the carrying amount each period. At maturity, the
carrying amount converges to the face amount to be repaid.
8. A fair value measurement of Keystone Corporation relies on a significant Level 3 input even though some other
inputs are Level 2. How is the overall measurement classified in the hierarchy?
A. At the lowest level of any input that is significant to the entire measurement, so Level 3
B. Always Level 2 when multiple levels are mixed
C. Always Level 1 if any quoted price is used
D. Outside the hierarchy
Correct Answer: A. At the lowest level of any input that is significant to the entire measurement, so Level 3
Explanation: The hierarchy level for the overall fair value measurement is based on the lowest-level input that is
significant to the measurement in its entirety.
ANSWERS AND EXPLANATIONS
| American Public University
1. A new Accounting Standards Update applies to Triton Corporation and includes explicit transition instructions
that differ from the general retrospective model in Topic 250. Which transition approach should Triton
Corporation follow?
A. Management's preferred method if disclosed
B. The transition method specified by the new standard
C. Always prospective application
D. Always full retrospective application regardless of the standard's instructions
Correct Answer: B. The transition method specified by the new standard
Explanation: Specific transition provisions in a newly issued accounting standard govern adoption. The general
accounting-change model applies when more specific authoritative transition guidance does not override it.
2. Orion Corporation has net income of $900,000, convertible preferred dividends of $60,000, 240,000
weighted-average common shares, and preferred shares convertible into 40,000 common shares. Assuming
conversion is dilutive and the preferred dividends are not tax-deductible, what is diluted EPS?
A. $3.21
B. $3.75
C. $3.00
D. $3.50
Correct Answer: A. $3.21
Explanation: Under the if-converted method, add back the convertible preferred dividends to the numerator and add the
conversion shares to the denominator. $900,,000 = $3.21.
3. What is the effect of Quartz Corporation's stock split on retained earnings?
A. Retained earnings is reduced by the fair value of new shares
B. Retained earnings is increased by par value
C. Retained earnings is eliminated
D. No change
Correct Answer: D. No change
Explanation: A stock split changes share count and par or stated value per share but does not transfer amounts out of
retained earnings or change total equity.
4. In measuring Summit Corporation's net periodic pension cost, what is the broad effect of the expected return on
plan assets?
A. It reduces net periodic pension cost
B. It is recognized as revenue from customers
C. It is added to service cost
D. It increases the PBO directly
Correct Answer: A. It reduces net periodic pension cost
Explanation: The expected return on plan assets is a component that reduces net periodic pension cost. Actual asset
performance affects plan assets and may create actuarial gains or losses relative to expectations.
, 5. Unity Corporation pays cash income taxes that are not specifically identifiable with an investing or financing
transaction. How are the payments generally classified under U.S. GAAP?
A. Noncash activities
B. Operating outflows
C. Investing outflows
D. Financing outflows
Correct Answer: B. Operating outflows
Explanation: Income taxes paid are generally operating cash flows under U.S. GAAP unless a specific portion can be
appropriately identified with an investing or financing transaction under the applicable guidance.
6. Why is a liability-classified share-based award of Beacon Corporation more sensitive to later stock-price
changes than an otherwise similar equity-classified award?
A. Because equity awards are remeasured daily and liability awards are fixed
B. Because the liability award is remeasured to fair value through settlement
C. Because equity awards always settle in cash
D. Because liability awards are never expensed
Correct Answer: B. Because the liability award is remeasured to fair value through settlement
Explanation: Liability-classified awards are remeasured at each reporting date until settlement, so later changes in share
price can change compensation cost. Equity-classified awards are generally fixed at grant-date fair value for
measurement purposes.
7. Meridian Corporation issued bonds at a discount and has used the effective-interest method correctly for several
years. If the bonds are held to maturity with no modification, what should happen to their carrying amount as
maturity approaches?
A. It should decrease toward zero
B. It should increase toward the face value
C. It should fluctuate with market value each reporting period
D. It should remain at the original issue price
Correct Answer: B. It should increase toward the face value
Explanation: Effective-interest amortization of a discount increases the carrying amount each period. At maturity, the
carrying amount converges to the face amount to be repaid.
8. A fair value measurement of Keystone Corporation relies on a significant Level 3 input even though some other
inputs are Level 2. How is the overall measurement classified in the hierarchy?
A. At the lowest level of any input that is significant to the entire measurement, so Level 3
B. Always Level 2 when multiple levels are mixed
C. Always Level 1 if any quoted price is used
D. Outside the hierarchy
Correct Answer: A. At the lowest level of any input that is significant to the entire measurement, so Level 3
Explanation: The hierarchy level for the overall fair value measurement is based on the lowest-level input that is
significant to the measurement in its entirety.
