ACCT 305 TOPIC EXAMS QUESTIONS WITH
ANSWERS AND EXPLANATIONS
| American Public University
1. Redwood Corporation amends its defined-benefit plan and grants employees credit for prior service, creating
prior service cost. Where is that cost generally recognized initially?
A. Directly as a reduction of common stock
B. It is never recognized because it relates to prior service
C. In other comprehensive income, with subsequent amortization to pension cost as applicable
D. Immediately and entirely in operating income
Correct Answer: C. In other comprehensive income, with subsequent amortization to pension cost as applicable
Explanation: Prior service cost from a plan amendment is generally recognized initially in OCI and then amortized to
pension cost over the relevant service period under the pension accounting guidance.
2. Environmental regulators require Quartz Corporation to remediate contamination caused by past operations.
Management concludes the obligation is probable and estimates the remediation cost at $350,000. What is the
primary year-end accounting response?
A. Recognize a loss and liability of $350,000
B. Recognize no amount until remediation work begins
C. Record the amount as a direct reduction of common stock
D. Recognize an asset because remediation improves the property
Correct Answer: A. Recognize a loss and liability of $350,000
Explanation: A present obligation from past contamination that is probable and reasonably estimable is accrued as a
loss and liability. Later cash spending settles the recognized obligation.
3. Willow Corporation presents components of OCI net of tax. What does this presentation mean?
A. OCI is presented before tax but labeled net of tax
B. Each OCI amount reflects its related income tax effect
C. OCI is never subject to income taxes
D. All OCI taxes are charged to continuing operations
Correct Answer: B. Each OCI amount reflects its related income tax effect
Explanation: OCI may be presented net of related tax effects, or before tax with a single aggregate tax amount,
depending on the presentation method. A net-of-tax presentation incorporates each item's tax effect.
4. Nimbus Corporation reports a net loss. Including outstanding stock options in the diluted loss-per-share
computation would reduce the loss per share. How should the options be treated?
A. Move the option effect to other comprehensive income
B. Exclude them as antidilutive
C. Include half of the options
D. Include them because options are always part of diluted EPS
Correct Answer: B. Exclude them as antidilutive
Explanation: Potential common shares are excluded when their inclusion would be antidilutive. In a loss situation,
adding shares often reduces the reported loss per share and therefore is antidilutive.
, 5. Before applying hedge accounting, what should Falcon Corporation do for a designated hedge relationship?
A. Avoid identifying the hedged risk
B. Wait until year-end to decide whether the hedge was intended
C. Complete the required contemporaneous designation and documentation of the hedging relationship and
risk-management objective
D. Recognize all hedge gains directly in retained earnings
Correct Answer: C. Complete the required contemporaneous designation and documentation of the hedging
relationship and risk-management objective
Explanation: Qualifying hedge accounting requires timely formal designation and documentation of the hedging
relationship, hedged item or transaction, hedging instrument, risk, and method of assessing effectiveness.
6. Pioneer Corporation modifies an existing lease by adding the right to use additional office space at consideration
commensurate with the standalone price of that added right. How is the modification generally accounted for?
A. As a separate contract
B. By eliminating the original lease liability
C. As an immediate gain in earnings
D. As a prior-period error
Correct Answer: A. As a separate contract
Explanation: A lease modification that grants an additional right of use and increases consideration by an amount
commensurate with the standalone price is generally accounted for as a separate contract.
7. Customers place refundable deposits of $120,000 with York Corporation. The deposits will be returned unless
customers fail to satisfy contract conditions. How should the deposits generally be presented before they are
earned or forfeited?
A. As a contra-receivable
B. As revenue of $120,000
C. As additional paid-in capital of $120,000
D. As a liability of $120,000
Correct Answer: D. As a liability of $120,000
Explanation: Refundable customer deposits represent obligations to return cash or apply it under the contract. Until the
conditions for earning or retaining the deposits are satisfied, they are liabilities rather than revenue.
8. Meridian Corporation declares a property dividend consisting of an investment with a carrying amount of
$180,000 and fair value of $240,000. Before recording the dividend distribution, what income effect is generally
recognized?
A. Dividend expense of $240,000
B. No gain or loss because dividends bypass income
C. A gain of $60,000
D. A loss of $60,000
Correct Answer: C. A gain of $60,000
Explanation: Before a noncash asset is distributed as a property dividend, it is generally remeasured to fair value and
the resulting gain or loss is recognized. Here fair value exceeds carrying amount by $60,000.
ANSWERS AND EXPLANATIONS
| American Public University
1. Redwood Corporation amends its defined-benefit plan and grants employees credit for prior service, creating
prior service cost. Where is that cost generally recognized initially?
A. Directly as a reduction of common stock
B. It is never recognized because it relates to prior service
C. In other comprehensive income, with subsequent amortization to pension cost as applicable
D. Immediately and entirely in operating income
Correct Answer: C. In other comprehensive income, with subsequent amortization to pension cost as applicable
Explanation: Prior service cost from a plan amendment is generally recognized initially in OCI and then amortized to
pension cost over the relevant service period under the pension accounting guidance.
2. Environmental regulators require Quartz Corporation to remediate contamination caused by past operations.
Management concludes the obligation is probable and estimates the remediation cost at $350,000. What is the
primary year-end accounting response?
A. Recognize a loss and liability of $350,000
B. Recognize no amount until remediation work begins
C. Record the amount as a direct reduction of common stock
D. Recognize an asset because remediation improves the property
Correct Answer: A. Recognize a loss and liability of $350,000
Explanation: A present obligation from past contamination that is probable and reasonably estimable is accrued as a
loss and liability. Later cash spending settles the recognized obligation.
3. Willow Corporation presents components of OCI net of tax. What does this presentation mean?
A. OCI is presented before tax but labeled net of tax
B. Each OCI amount reflects its related income tax effect
C. OCI is never subject to income taxes
D. All OCI taxes are charged to continuing operations
Correct Answer: B. Each OCI amount reflects its related income tax effect
Explanation: OCI may be presented net of related tax effects, or before tax with a single aggregate tax amount,
depending on the presentation method. A net-of-tax presentation incorporates each item's tax effect.
4. Nimbus Corporation reports a net loss. Including outstanding stock options in the diluted loss-per-share
computation would reduce the loss per share. How should the options be treated?
A. Move the option effect to other comprehensive income
B. Exclude them as antidilutive
C. Include half of the options
D. Include them because options are always part of diluted EPS
Correct Answer: B. Exclude them as antidilutive
Explanation: Potential common shares are excluded when their inclusion would be antidilutive. In a loss situation,
adding shares often reduces the reported loss per share and therefore is antidilutive.
, 5. Before applying hedge accounting, what should Falcon Corporation do for a designated hedge relationship?
A. Avoid identifying the hedged risk
B. Wait until year-end to decide whether the hedge was intended
C. Complete the required contemporaneous designation and documentation of the hedging relationship and
risk-management objective
D. Recognize all hedge gains directly in retained earnings
Correct Answer: C. Complete the required contemporaneous designation and documentation of the hedging
relationship and risk-management objective
Explanation: Qualifying hedge accounting requires timely formal designation and documentation of the hedging
relationship, hedged item or transaction, hedging instrument, risk, and method of assessing effectiveness.
6. Pioneer Corporation modifies an existing lease by adding the right to use additional office space at consideration
commensurate with the standalone price of that added right. How is the modification generally accounted for?
A. As a separate contract
B. By eliminating the original lease liability
C. As an immediate gain in earnings
D. As a prior-period error
Correct Answer: A. As a separate contract
Explanation: A lease modification that grants an additional right of use and increases consideration by an amount
commensurate with the standalone price is generally accounted for as a separate contract.
7. Customers place refundable deposits of $120,000 with York Corporation. The deposits will be returned unless
customers fail to satisfy contract conditions. How should the deposits generally be presented before they are
earned or forfeited?
A. As a contra-receivable
B. As revenue of $120,000
C. As additional paid-in capital of $120,000
D. As a liability of $120,000
Correct Answer: D. As a liability of $120,000
Explanation: Refundable customer deposits represent obligations to return cash or apply it under the contract. Until the
conditions for earning or retaining the deposits are satisfied, they are liabilities rather than revenue.
8. Meridian Corporation declares a property dividend consisting of an investment with a carrying amount of
$180,000 and fair value of $240,000. Before recording the dividend distribution, what income effect is generally
recognized?
A. Dividend expense of $240,000
B. No gain or loss because dividends bypass income
C. A gain of $60,000
D. A loss of $60,000
Correct Answer: C. A gain of $60,000
Explanation: Before a noncash asset is distributed as a property dividend, it is generally remeasured to fair value and
the resulting gain or loss is recognized. Here fair value exceeds carrying amount by $60,000.
