Intermediate Accounting II (Units 4–6) Assessment 2026 UPDATE
1. When a company issues bonds at a discount, how is the interest expense recorded using
the effective-interest method?
A. Interest expense is less than the cash paid.
B. Interest expense is greater than the cash paid.
C. Interest expense is equal to the cash paid.
D. Interest expense decreases every year until maturity.
Answer: B
Rationale: Under the effective-interest method, the interest expense is calculated by
multiplying the carrying value of the bond by the market interest rate. Since the bond is at a
discount, the carrying value increases over time, and the interest expense will be greater
than the fixed cash payment (coupon).
2. A company should accrue a liability for a loss contingency if which of the following
conditions are met?
A. The loss is possible and can be estimated.
B. The loss is remote but significant.
C. The loss is probable and can be reasonably estimated.
D. The loss is probable even if it cannot be estimated.
,Answer: C
Rationale: According to GAAP, a loss contingency must be accrued (recorded as a liability)
only if it is both probable that a liability has been incurred and the amount can be
reasonably estimated.
3. Which of the following describes the ‘Effective Interest Rate’?
A. The rate stated on the bond certificate.
B. The rate used to determine the cash interest payment.
C. The market rate of interest at the time the bonds are issued.
D. The rate that never changes throughout the life of the bond.
Answer: C
Rationale: The effective interest rate is the market rate of interest at the time of issuance,
used to discount the bond’s cash flows to its present value.
4. How should a company account for a change in an accounting estimate, such as the useful
life of a depreciable asset?
A. Retrospectively by adjusting prior years’ financial statements.
B. By restating all comparative financial statements presented.
C. By reporting it as a prior period adjustment to Retained Earnings.
D. Prospectively in the current and future periods.
Answer: D
, Rationale: Changes in accounting estimates are accounted for prospectively, meaning the
change affects the current period and future periods only.
5. Which of the following is true regarding Treasury Stock?
A. It is reported as an asset on the balance sheet.
B. It reduces the total number of shares authorized.
C. Dividends are paid on treasury stock.
D. It is a contra-equity account.
Answer: D
Rationale: Treasury stock is stock that a company has issued and then reacquired. It is
recorded as a deduction from total stockholders’ equity (a contra-equity account).
6. Under the cost method of accounting for treasury stock, when the stock is resold for more
than its cost, the difference is credited to:
A. Gain on Sale of Treasury Stock.
B. Retained Earnings.
C. Paid-in Capital from Treasury Stock.
D. Common Stock.
Answer: C
Rationale: Gains or losses are not recognized on the income statement for treasury stock
transactions. Excess proceeds over cost are credited to Paid-in Capital from Treasury Stock.
1. When a company issues bonds at a discount, how is the interest expense recorded using
the effective-interest method?
A. Interest expense is less than the cash paid.
B. Interest expense is greater than the cash paid.
C. Interest expense is equal to the cash paid.
D. Interest expense decreases every year until maturity.
Answer: B
Rationale: Under the effective-interest method, the interest expense is calculated by
multiplying the carrying value of the bond by the market interest rate. Since the bond is at a
discount, the carrying value increases over time, and the interest expense will be greater
than the fixed cash payment (coupon).
2. A company should accrue a liability for a loss contingency if which of the following
conditions are met?
A. The loss is possible and can be estimated.
B. The loss is remote but significant.
C. The loss is probable and can be reasonably estimated.
D. The loss is probable even if it cannot be estimated.
,Answer: C
Rationale: According to GAAP, a loss contingency must be accrued (recorded as a liability)
only if it is both probable that a liability has been incurred and the amount can be
reasonably estimated.
3. Which of the following describes the ‘Effective Interest Rate’?
A. The rate stated on the bond certificate.
B. The rate used to determine the cash interest payment.
C. The market rate of interest at the time the bonds are issued.
D. The rate that never changes throughout the life of the bond.
Answer: C
Rationale: The effective interest rate is the market rate of interest at the time of issuance,
used to discount the bond’s cash flows to its present value.
4. How should a company account for a change in an accounting estimate, such as the useful
life of a depreciable asset?
A. Retrospectively by adjusting prior years’ financial statements.
B. By restating all comparative financial statements presented.
C. By reporting it as a prior period adjustment to Retained Earnings.
D. Prospectively in the current and future periods.
Answer: D
, Rationale: Changes in accounting estimates are accounted for prospectively, meaning the
change affects the current period and future periods only.
5. Which of the following is true regarding Treasury Stock?
A. It is reported as an asset on the balance sheet.
B. It reduces the total number of shares authorized.
C. Dividends are paid on treasury stock.
D. It is a contra-equity account.
Answer: D
Rationale: Treasury stock is stock that a company has issued and then reacquired. It is
recorded as a deduction from total stockholders’ equity (a contra-equity account).
6. Under the cost method of accounting for treasury stock, when the stock is resold for more
than its cost, the difference is credited to:
A. Gain on Sale of Treasury Stock.
B. Retained Earnings.
C. Paid-in Capital from Treasury Stock.
D. Common Stock.
Answer: C
Rationale: Gains or losses are not recognized on the income statement for treasury stock
transactions. Excess proceeds over cost are credited to Paid-in Capital from Treasury Stock.
