WGU D104 OA 2 Intermediate Accounting II Practice Exam 338
Questions with Answers and Detailed Rationales
Questions 1 to 50
1. How is the first coupon payment recorded when discounted bonds were
issued between interest dates and accrued interest was collected at
issuance?
Answer Debit interest expense for the post-issuance period, debit the accrued-
interest liability collected, credit discount amortization, and credit cash for the
full coupon.
Rationale The issuer collected the pre-issuance share of the next coupon from
the buyer. That amount is returned through the coupon payment, not recognized
as the issuer’s new expense. Interest expense and discount amortization apply
only to the period after issuance.
2. What does an activity-based cost-allocation method associate an asset’s
cost with?
Answer Output, usage, or another measure of productive activity.
Rationale An activity measure links allocated cost to the service consumed in
production. Time-based methods instead allocate by elapsed service periods. The
selected measure should reasonably reflect consumption of benefits rather than
be chosen solely to obtain a desired net-income figure.
3. What is depreciation in financial accounting?
Answer Systematic and rational allocation of a tangible asset’s depreciable cost
over its useful life.
Rationale Depreciation allocates cost to periods benefiting from the asset. It
does not measure each period’s market-value change or automatically
accumulate cash for replacement. Estimated useful life, salvage value, and the
pattern of benefit consumption determine the appropriate allocation.
D104 OA 2 Practice Exam | 1
,4. How is a short-term obligation presented when qualifying post-balance-
sheet equity issuance demonstrates long-term refinancing under US GAAP?
Answer Exclude the eligible amount from current liabilities, but keep it
classified as debt at the balance-sheet date.
Rationale The refinancing exception requires intent and demonstrated ability
under ASC 470-10. Equity proceeds obtained after the reporting date do not turn
the reporting-date obligation into stockholders’ equity. The amount reclassified
cannot exceed qualifying refinancing proceeds applicable to that debt.
5. What are typical debt issuance costs, and how are qualifying costs
presented for issued nonrevolving debt?
Answer Legal, accounting, printing, and underwriting costs; qualifying
unamortized amounts deduct from the debt’s carrying amount.
Rationale These incremental financing costs do not change contractual
principal. They reduce the net debt balance and are generally amortized into
interest expense using the effective-interest method. Fees paid to the creditor can
be treated as a reduction of proceeds; revolving arrangements have separate
guidance.
6. What is a convertible bond?
Answer A debt instrument that permits conversion into another security,
commonly the issuer’s common shares, under specified terms.
Rationale The conversion feature offers a potential equity interest while the
instrument otherwise contains a borrowing obligation. Conversion terms specify
matters such as conversion ratio and exercise period. Its effect on diluted EPS
requires the applicable method and an antidilution test.
7. What is composite life, and how is it calculated?
Answer Total depreciable base for the group divided by total annual
depreciation.
Rationale The numerator is total cost less estimated salvage value, not total
original cost alone. The result is a weighted group service life rather than a
simple arithmetic average. Composite depreciation commonly applies to
dissimilar assets with different individual lives.
D104 OA 2 Practice Exam | 2
,8. What are the basic issuer entries for a bond issued at par, paying
periodic interest, and repaid at maturity?
Answer Issue: Dr Cash, Cr Bonds payable. Interest: Dr Interest expense, Cr Cash.
Maturity: Dr Bonds payable, Cr Cash.
Rationale At par, stated and market rates generally coincide, so no initial
discount or premium requires amortization. Periodic coupon interest is face
value times the stated periodic rate. These simplified entries assume no issuance
costs, accrued interest, or other adjustments.
9. What is a gain contingency, and is the gain normally accrued before
realization?
Answer An uncertain potential gain; generally do not recognize it before
realization under the applicable guidance.
Rationale Recognizing an uncertain gain prematurely could anticipate income
that may never be received. Appropriate disclosure may be needed, but must not
imply greater certainty than the facts support. Special recognition rules for items
such as tax assets or recoveries must be considered separately.
10. What term describes a qualifying reduction in a long-lived asset’s
carrying amount because its recorded cost is not recoverable?
Answer An impairment write-down.
Rationale An impairment is distinct from ordinary depreciation: it recognizes a
loss beyond systematic cost allocation when the relevant recognition and
measurement tests are met. Not every write-off is an impairment; disposal, bad-
debt, and inventory rules have their own models.
11. What is depletion, and what allocation method is commonly used for
natural resources?
Answer Allocation of resource cost to extracted output, commonly using units of
production.
Rationale Calculate a cost per estimated recoverable unit and apply it to units
extracted. That cost generally enters inventory when production occurs and
becomes cost of goods sold when the output is sold. Unsold extracted resources
retain their assigned cost in inventory, subject to other measurement rules.
D104 OA 2 Practice Exam | 3
, 12. Why does US GAAP use a recoverability test for held-and-used long-
lived assets?
Answer To assess whether the recorded carrying amount is recoverable from
expected undiscounted use and disposal cash flows.
Rationale The test avoids treating every market-price decline as an immediate
write-down under the historical-cost model. When recoverability fails and fair
value is lower, measure the impairment using fair value. Do not confuse the
undiscounted screening calculation with the loss-measurement calculation.
13. Must all unsuccessful natural-resource exploration costs always be
capitalized?
Answer No; treatment depends on the industry, the accounting method, and
whether costs remain recoverable.
Rationale Under successful-efforts oil-and-gas accounting, many unsuccessful
exploration costs are expensed. Full-cost rules capitalize exploration costs within
a defined cost center, subject to limitations. Abandoned rights or unrecoverable
acquisition balances may require write-off; company size alone does not
determine treatment.
14. What is an assurance-type warranty, and when is its estimated cost
recognized?
Answer A promise that the product meets agreed specifications; accrue its
probable, reasonably estimable cost with the related sale.
Rationale The warranty assures the quality of the product delivered rather than
providing a separately purchased future service. Record warranty expense and a
warranty liability when recognition criteria are met. Later repairs reduce the
liability rather than creating the same expense a second time.
15. How is the issue price of a conventional coupon bond determined?
Answer Present value of principal plus present value of contractual interest
payments, discounted at the market yield.
Rationale Principal is ordinarily a single maturity cash flow, and equal coupons
form an annuity. Match the discount rate and number of periods to payment
frequency. A single-sum present value alone is sufficient only when there are no
intervening coupon cash flows.
D104 OA 2 Practice Exam | 4
Questions with Answers and Detailed Rationales
Questions 1 to 50
1. How is the first coupon payment recorded when discounted bonds were
issued between interest dates and accrued interest was collected at
issuance?
Answer Debit interest expense for the post-issuance period, debit the accrued-
interest liability collected, credit discount amortization, and credit cash for the
full coupon.
Rationale The issuer collected the pre-issuance share of the next coupon from
the buyer. That amount is returned through the coupon payment, not recognized
as the issuer’s new expense. Interest expense and discount amortization apply
only to the period after issuance.
2. What does an activity-based cost-allocation method associate an asset’s
cost with?
Answer Output, usage, or another measure of productive activity.
Rationale An activity measure links allocated cost to the service consumed in
production. Time-based methods instead allocate by elapsed service periods. The
selected measure should reasonably reflect consumption of benefits rather than
be chosen solely to obtain a desired net-income figure.
3. What is depreciation in financial accounting?
Answer Systematic and rational allocation of a tangible asset’s depreciable cost
over its useful life.
Rationale Depreciation allocates cost to periods benefiting from the asset. It
does not measure each period’s market-value change or automatically
accumulate cash for replacement. Estimated useful life, salvage value, and the
pattern of benefit consumption determine the appropriate allocation.
D104 OA 2 Practice Exam | 1
,4. How is a short-term obligation presented when qualifying post-balance-
sheet equity issuance demonstrates long-term refinancing under US GAAP?
Answer Exclude the eligible amount from current liabilities, but keep it
classified as debt at the balance-sheet date.
Rationale The refinancing exception requires intent and demonstrated ability
under ASC 470-10. Equity proceeds obtained after the reporting date do not turn
the reporting-date obligation into stockholders’ equity. The amount reclassified
cannot exceed qualifying refinancing proceeds applicable to that debt.
5. What are typical debt issuance costs, and how are qualifying costs
presented for issued nonrevolving debt?
Answer Legal, accounting, printing, and underwriting costs; qualifying
unamortized amounts deduct from the debt’s carrying amount.
Rationale These incremental financing costs do not change contractual
principal. They reduce the net debt balance and are generally amortized into
interest expense using the effective-interest method. Fees paid to the creditor can
be treated as a reduction of proceeds; revolving arrangements have separate
guidance.
6. What is a convertible bond?
Answer A debt instrument that permits conversion into another security,
commonly the issuer’s common shares, under specified terms.
Rationale The conversion feature offers a potential equity interest while the
instrument otherwise contains a borrowing obligation. Conversion terms specify
matters such as conversion ratio and exercise period. Its effect on diluted EPS
requires the applicable method and an antidilution test.
7. What is composite life, and how is it calculated?
Answer Total depreciable base for the group divided by total annual
depreciation.
Rationale The numerator is total cost less estimated salvage value, not total
original cost alone. The result is a weighted group service life rather than a
simple arithmetic average. Composite depreciation commonly applies to
dissimilar assets with different individual lives.
D104 OA 2 Practice Exam | 2
,8. What are the basic issuer entries for a bond issued at par, paying
periodic interest, and repaid at maturity?
Answer Issue: Dr Cash, Cr Bonds payable. Interest: Dr Interest expense, Cr Cash.
Maturity: Dr Bonds payable, Cr Cash.
Rationale At par, stated and market rates generally coincide, so no initial
discount or premium requires amortization. Periodic coupon interest is face
value times the stated periodic rate. These simplified entries assume no issuance
costs, accrued interest, or other adjustments.
9. What is a gain contingency, and is the gain normally accrued before
realization?
Answer An uncertain potential gain; generally do not recognize it before
realization under the applicable guidance.
Rationale Recognizing an uncertain gain prematurely could anticipate income
that may never be received. Appropriate disclosure may be needed, but must not
imply greater certainty than the facts support. Special recognition rules for items
such as tax assets or recoveries must be considered separately.
10. What term describes a qualifying reduction in a long-lived asset’s
carrying amount because its recorded cost is not recoverable?
Answer An impairment write-down.
Rationale An impairment is distinct from ordinary depreciation: it recognizes a
loss beyond systematic cost allocation when the relevant recognition and
measurement tests are met. Not every write-off is an impairment; disposal, bad-
debt, and inventory rules have their own models.
11. What is depletion, and what allocation method is commonly used for
natural resources?
Answer Allocation of resource cost to extracted output, commonly using units of
production.
Rationale Calculate a cost per estimated recoverable unit and apply it to units
extracted. That cost generally enters inventory when production occurs and
becomes cost of goods sold when the output is sold. Unsold extracted resources
retain their assigned cost in inventory, subject to other measurement rules.
D104 OA 2 Practice Exam | 3
, 12. Why does US GAAP use a recoverability test for held-and-used long-
lived assets?
Answer To assess whether the recorded carrying amount is recoverable from
expected undiscounted use and disposal cash flows.
Rationale The test avoids treating every market-price decline as an immediate
write-down under the historical-cost model. When recoverability fails and fair
value is lower, measure the impairment using fair value. Do not confuse the
undiscounted screening calculation with the loss-measurement calculation.
13. Must all unsuccessful natural-resource exploration costs always be
capitalized?
Answer No; treatment depends on the industry, the accounting method, and
whether costs remain recoverable.
Rationale Under successful-efforts oil-and-gas accounting, many unsuccessful
exploration costs are expensed. Full-cost rules capitalize exploration costs within
a defined cost center, subject to limitations. Abandoned rights or unrecoverable
acquisition balances may require write-off; company size alone does not
determine treatment.
14. What is an assurance-type warranty, and when is its estimated cost
recognized?
Answer A promise that the product meets agreed specifications; accrue its
probable, reasonably estimable cost with the related sale.
Rationale The warranty assures the quality of the product delivered rather than
providing a separately purchased future service. Record warranty expense and a
warranty liability when recognition criteria are met. Later repairs reduce the
liability rather than creating the same expense a second time.
15. How is the issue price of a conventional coupon bond determined?
Answer Present value of principal plus present value of contractual interest
payments, discounted at the market yield.
Rationale Principal is ordinarily a single maturity cash flow, and equal coupons
form an annuity. Match the discount rate and number of periods to payment
frequency. A single-sum present value alone is sufficient only when there are no
intervening coupon cash flows.
D104 OA 2 Practice Exam | 4
