ACCT 305 STUDY GUIDE QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Keystone Corporation has zero-coupon bonds with a face value of $1,000,000 and a beginning carrying amount
of $930,000. No cash interest is paid during the year. What happens as effective interest is recognized?
A. No interest expense is recognized until maturity
B. Interest expense decreases the carrying amount toward zero
C. The carrying amount remains fixed because no cash interest is paid
D. Interest expense increases the carrying amount of the bonds toward face value
Correct Answer: D. Interest expense increases the carrying amount of the bonds toward face value
Explanation: A zero-coupon bond is issued at a discount. Effective interest expense is recognized even though no
periodic cash interest is paid, and the discount amortization increases carrying amount toward face value by maturity.
2. Orion Corporation enters a lease with a 10-month term and no purchase option that it is reasonably certain to
exercise. If Orion Corporation elects the short-term lease accounting policy for the relevant class of assets, what is
the general result?
A. Lease payments are recognized as lease expense without recognizing a right-of-use asset and lease liability
B. A finance-lease liability is required because all leases go on the balance sheet
C. The underlying asset is capitalized as property, plant, and equipment
D. The lease is recorded as prepaid rent for the full contract term
Correct Answer: A. Lease payments are recognized as lease expense without recognizing a right-of-use asset and
lease liability
Explanation: Topic 842 permits a policy election for qualifying short-term leases, generally leases of 12 months or less
with no purchase option reasonably certain to be exercised. The lessee can recognize lease payments as expense rather
than record an ROU asset and lease liability.
3. Orion Corporation has participating preferred stock. What feature distinguishes participating preferred from
ordinary nonparticipating preferred stock?
A. It must be classified as treasury stock
B. It may share in additional dividends with common shareholders after the stated preference is satisfied
C. It automatically converts to debt
D. It can never receive a stated dividend
Correct Answer: B. It may share in additional dividends with common shareholders after the stated preference is
satisfied
Explanation: Participating preferred stock can share in additional distributions after its stated dividend preference is
met, according to the participation terms.
, 4. A defined-benefit plan of Quartz Corporation pays benefits to retirees directly from plan assets. Ignoring
actuarial effects, what happens to the PBO and plan assets?
A. Both increase because a benefit obligation has been settled
B. Both decrease by the benefit payments
C. Only plan assets decrease
D. Only the PBO decreases
Correct Answer: B. Both decrease by the benefit payments
Explanation: Benefit payments settle a portion of the obligation and are paid from plan assets. Accordingly, both the
PBO and plan assets decrease by the payments, leaving funded status unchanged from the payment itself.
5. Meridian Corporation has only common stock outstanding and no options, convertibles, or other potential
common shares. What relationship should normally exist between basic and diluted EPS?
A. Basic EPS must always be lower
B. Diluted EPS is omitted whenever it equals basic EPS
C. They should be the same
D. Diluted EPS must always be lower
Correct Answer: C. They should be the same
Explanation: If an entity has no dilutive potential common shares, there is nothing to adjust in the diluted calculation.
Basic and diluted EPS therefore coincide.
6. Triton Corporation arranges for a third party to provide a service to a customer. Before transfer, Triton
Corporation does not control the service and its role is primarily to arrange for the third party to perform. How
should revenue generally be presented?
A. In OCI until the third party is paid
B. Gross for the full customer billing because {c} signed the contract
C. Net, reflecting the fee or commission retained as an agent
D. As financing income
Correct Answer: C. Net, reflecting the fee or commission retained as an agent
Explanation: An entity that is an agent does not control the specified good or service before transfer. It generally
recognizes as revenue the net fee or commission it expects to retain rather than the gross amount billed to the customer.
7. York Corporation enters a significant purchase commitment that has not yet resulted in a recognized asset or
liability. Why might disclosure still be required?
A. Because commitments are always current liabilities
B. Because disclosure converts the commitment into equity
C. Because every contract must be recognized as revenue
D. Because material commitments can affect users' assessment of future cash needs and risk even without current
recognition
Correct Answer: D. Because material commitments can affect users' assessment of future cash needs and risk even
without current recognition
Explanation: Material commitments may warrant disclosure even when recognition criteria for an asset or liability are
not met, because they can significantly affect future resources and obligations.
ANSWERS AND EXPLANATIONS
| American Public University
1. Keystone Corporation has zero-coupon bonds with a face value of $1,000,000 and a beginning carrying amount
of $930,000. No cash interest is paid during the year. What happens as effective interest is recognized?
A. No interest expense is recognized until maturity
B. Interest expense decreases the carrying amount toward zero
C. The carrying amount remains fixed because no cash interest is paid
D. Interest expense increases the carrying amount of the bonds toward face value
Correct Answer: D. Interest expense increases the carrying amount of the bonds toward face value
Explanation: A zero-coupon bond is issued at a discount. Effective interest expense is recognized even though no
periodic cash interest is paid, and the discount amortization increases carrying amount toward face value by maturity.
2. Orion Corporation enters a lease with a 10-month term and no purchase option that it is reasonably certain to
exercise. If Orion Corporation elects the short-term lease accounting policy for the relevant class of assets, what is
the general result?
A. Lease payments are recognized as lease expense without recognizing a right-of-use asset and lease liability
B. A finance-lease liability is required because all leases go on the balance sheet
C. The underlying asset is capitalized as property, plant, and equipment
D. The lease is recorded as prepaid rent for the full contract term
Correct Answer: A. Lease payments are recognized as lease expense without recognizing a right-of-use asset and
lease liability
Explanation: Topic 842 permits a policy election for qualifying short-term leases, generally leases of 12 months or less
with no purchase option reasonably certain to be exercised. The lessee can recognize lease payments as expense rather
than record an ROU asset and lease liability.
3. Orion Corporation has participating preferred stock. What feature distinguishes participating preferred from
ordinary nonparticipating preferred stock?
A. It must be classified as treasury stock
B. It may share in additional dividends with common shareholders after the stated preference is satisfied
C. It automatically converts to debt
D. It can never receive a stated dividend
Correct Answer: B. It may share in additional dividends with common shareholders after the stated preference is
satisfied
Explanation: Participating preferred stock can share in additional distributions after its stated dividend preference is
met, according to the participation terms.
, 4. A defined-benefit plan of Quartz Corporation pays benefits to retirees directly from plan assets. Ignoring
actuarial effects, what happens to the PBO and plan assets?
A. Both increase because a benefit obligation has been settled
B. Both decrease by the benefit payments
C. Only plan assets decrease
D. Only the PBO decreases
Correct Answer: B. Both decrease by the benefit payments
Explanation: Benefit payments settle a portion of the obligation and are paid from plan assets. Accordingly, both the
PBO and plan assets decrease by the payments, leaving funded status unchanged from the payment itself.
5. Meridian Corporation has only common stock outstanding and no options, convertibles, or other potential
common shares. What relationship should normally exist between basic and diluted EPS?
A. Basic EPS must always be lower
B. Diluted EPS is omitted whenever it equals basic EPS
C. They should be the same
D. Diluted EPS must always be lower
Correct Answer: C. They should be the same
Explanation: If an entity has no dilutive potential common shares, there is nothing to adjust in the diluted calculation.
Basic and diluted EPS therefore coincide.
6. Triton Corporation arranges for a third party to provide a service to a customer. Before transfer, Triton
Corporation does not control the service and its role is primarily to arrange for the third party to perform. How
should revenue generally be presented?
A. In OCI until the third party is paid
B. Gross for the full customer billing because {c} signed the contract
C. Net, reflecting the fee or commission retained as an agent
D. As financing income
Correct Answer: C. Net, reflecting the fee or commission retained as an agent
Explanation: An entity that is an agent does not control the specified good or service before transfer. It generally
recognizes as revenue the net fee or commission it expects to retain rather than the gross amount billed to the customer.
7. York Corporation enters a significant purchase commitment that has not yet resulted in a recognized asset or
liability. Why might disclosure still be required?
A. Because commitments are always current liabilities
B. Because disclosure converts the commitment into equity
C. Because every contract must be recognized as revenue
D. Because material commitments can affect users' assessment of future cash needs and risk even without current
recognition
Correct Answer: D. Because material commitments can affect users' assessment of future cash needs and risk even
without current recognition
Explanation: Material commitments may warrant disclosure even when recognition criteria for an asset or liability are
not met, because they can significantly affect future resources and obligations.
