ACCT 307 FINAL REVIEW |
78 Questions and Answers |
Rated 100% Correct | Cost
Accounting Exam | A+ Graded
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[DOMAIN 1: CURRENT LIABILITIES & CONTINGENCIES - 10 Questions]
Question 1.1
What is the definition of a current liability?
A. Obligations due within five years
B. Obligations due within one year or operating cycle, whichever is longer [CORRECT]
C. Obligations due within one month
D. Obligations with no due date
Rationale: Current liabilities are obligations whose liquidation is reasonably expected to require
use of existing current assets or creation of other current liabilities within one year or the
operating cycle, whichever is longer. This definition is crucial for liquidity analysis and working
capital calculations. The operating cycle is the time from cash investment in inventory to cash
collection from customers.
Question 1.2
When should a loss contingency be accrued?
A. When it is possible
B. When it is probable and the amount can be reasonably estimated [CORRECT]
C. When it is remote
D. Never
Rationale: Per ASC 450 (FASB Statement 5), a loss contingency must be accrued (recorded as
a liability and expense) if: (1) it is probable that a liability has been incurred, and (2) the amount
can be reasonably estimated. If probable but not estimable, disclosure is required. If reasonably
possible (more than remote but less than probable), disclosure is required. If remote, no
disclosure needed. This "probable and estimable" threshold is higher than for many other
accounting estimates.
Question 1.3
How are gain contingencies treated?
, . Accrued when probable
A
B. Disclosed when probable but never accrued until realized [CORRECT]
C. Accrued when reasonably possible
D. Ignored completely
Rationale: Gain contingencies are treated conservatively—they are never accrued (recognized
in income) until realized. Even if highly probable, gains are not recognized. If the gain is
probable, it may be disclosed in the notes, but care must be taken to avoid misleading
implications of realization. This asymmetry (losses accrued when probable, gains never accrued
until realized) reflects the conservatism constraint in accounting.
Question 1.4
What is the accounting for unearned revenue?
A. Recognize as revenue immediately when cash is received
B. Record as liability when cash received; recognize as revenue when performance obligation
satisfied [CORRECT]
C. Record as asset when cash received
D. Ignore until services are performed
Rationale: Unearned revenue (deferred revenue) is recorded as a liability when cash is received
because the company has an obligation to perform services or deliver goods in the future.
Revenue is recognized only when the performance obligation is satisfied (when goods/services
are provided). This follows the revenue recognition principle and creates a current or
non-current liability depending on the timing of performance.
Question 1.5
How are sales taxes payable recorded?
A. As revenue when collected
B. As a liability when collected from customers; remitted to government [CORRECT]
C. As an expense when collected
D. Ignored until paid to government
Rationale: Sales taxes collected from customers are recorded as Sales Tax Payable (a liability),
not revenue. The company acts as a collection agent for the government. When the tax is
remitted to the taxing authority, the liability is reduced. The entry when collecting: Debit Cash,
Credit Sales Revenue (net of tax) and Sales Tax Payable. Revenue is reported net of sales tax.
Question 1.6
What payroll taxes are employers required to match?
A. Federal income tax only
B. FICA (Social Security and Medicare) taxes [CORRECT]
C. Only state income tax
D. Only local taxes
Rationale: Employers must match employees' FICA taxes (Social Security 6.2% up to wage
base, Medicare 1.45% with no limit). Employers also pay federal and state unemployment taxes
(FUTA and SUTA). Federal income tax withheld is an employee obligation the employer remits
but does not match. The employer's payroll tax expense includes: matching FICA, FUTA, and
SUTA.
Question 1.7
How is the current portion of long-term debt classified?
, . As long-term liability
A
B. As current liability [CORRECT]
C. As stockholders' equity
D. As contra-asset
Rationale: The portion of long-term debt due within one year of the balance sheet date (or
operating cycle, if longer) is classified as a current liability. This includes principal payments due
within one year on notes, bonds, and mortgages. The remaining balance stays in long-term
liabilities. This classification is important for liquidity analysis and debt covenant compliance.
Question 1.8
What is a zero-interest-bearing note?
A. A note with no face value
B. A note where interest is implicit in the face amount [CORRECT]
C. A note with variable interest
D. A note that requires no repayment
Rationale: A zero-interest-bearing note has no stated interest rate, but interest is implicit in the
difference between face amount and present value (cash received). The note is recorded at
present value, with the discount amortized to interest expense over the note's life using the
effective interest method. For example, a $1,000 face note issued for $900 has $100 implicit
interest.
Question 1.9
How are compensated absences (vacation pay) accrued?
A. Never accrued
B. Accrued if the obligation is attributable to services already rendered, payment is probable,
and amount can be reasonably estimated [CORRECT]
C. Accrued only when taken
D. Accrued only for executives
Rationale: Per ASC 710, compensated absences (vacation, sick pay) are accrued as a liability
if: (1) the obligation is attributable to employees' services already rendered, (2) the rights vest or
accumulate, (3) payment is probable, and (4) the amount can be reasonably estimated. Sick
pay that doesn't vest (unused amounts lost) is not accrued. Vesting means the employee is
entitled to payment even if employment terminates.
Question 1.10
What disclosure is required for a reasonably possible loss contingency?
A. No disclosure
B. Disclosure of nature and estimated financial effect, or range of loss [CORRECT]
C. Accrual of the loss
D. Only disclosure if the amount is certain
Rationale: For reasonably possible loss contingencies (more than remote but less than
probable), disclosure is required of: (1) the nature of the contingency, and (2) an estimate of the
possible loss or range of loss, or a statement that such estimate cannot be made. This provides
users with information about risks that don't meet the accrual threshold but could materially
affect financial position.
[DOMAIN 2: LONG-TERM LIABILITIES (BONDS, NOTES) - 12 Questions]
Question 2.1
, hen are bonds issued at a discount?
W
A. When stated rate equals market rate
B. When stated rate is less than market rate [CORRECT]
C. When stated rate is greater than market rate
D. When bonds have no maturity date
Rationale: Bonds are issued at a discount when the stated (coupon) rate is less than the market
(effective) rate. Investors will pay less than face value to earn the market rate on their
investment. The discount represents additional interest that will be paid at maturity (difference
between cash received and face amount paid at maturity). The discount is amortized to interest
expense over the bond's life, increasing the effective interest rate to the market rate.
Question 2.2
How is bond interest expense calculated using the effective interest method?
A. Face value × Stated rate
B. Carrying value × Market rate [CORRECT]
C. Face value × Market rate
D. Issue price × Stated rate
Rationale: Under the effective interest method (required by GAAP), interest expense = Carrying
value of bonds at beginning of period × Market (effective) rate at issuance. Cash interest paid =
Face value × Stated rate. The difference amortizes the discount or premium. This method
produces a constant effective rate of interest and is theoretically superior to straight-line
amortization.
Question 2.3
What is the journal entry to issue bonds at a premium?
A. Debit Cash (face), Credit Bonds Payable (face)
B. Debit Cash (issue price), Credit Bonds Payable (face) and Premium on Bonds Payable
(difference) [CORRECT]
C. Debit Cash (face), Credit Bonds Payable (issue price)
D. Debit Discount, Credit Cash
Rationale: When bonds are issued at a premium (stated rate > market rate): Debit Cash for the
issue price (greater than face), Credit Bonds Payable for the face amount, and Credit Premium
on Bonds Payable for the excess. Premium on Bonds Payable is an adjunct liability account
(increases bonds payable). The premium will be amortized to reduce interest expense over the
bond's life.
Question 2.4
What happens to bond carrying value as a discount is amortized?
A. Decreases
B. Increases [CORRECT]
C. Stays the same
D. Becomes zero immediately
Rationale: For bonds issued at a discount, carrying value = Face value - Unamortized discount.
As discount is amortized (credited), the unamortized discount decreases, so carrying value
increases. At maturity, carrying value equals face value. For premium bonds, carrying value
decreases as premium is amortized. This "walking to par" reflects the accretion of value for
discount bonds.
78 Questions and Answers |
Rated 100% Correct | Cost
Accounting Exam | A+ Graded
| Pass Guaranteed
[DOMAIN 1: CURRENT LIABILITIES & CONTINGENCIES - 10 Questions]
Question 1.1
What is the definition of a current liability?
A. Obligations due within five years
B. Obligations due within one year or operating cycle, whichever is longer [CORRECT]
C. Obligations due within one month
D. Obligations with no due date
Rationale: Current liabilities are obligations whose liquidation is reasonably expected to require
use of existing current assets or creation of other current liabilities within one year or the
operating cycle, whichever is longer. This definition is crucial for liquidity analysis and working
capital calculations. The operating cycle is the time from cash investment in inventory to cash
collection from customers.
Question 1.2
When should a loss contingency be accrued?
A. When it is possible
B. When it is probable and the amount can be reasonably estimated [CORRECT]
C. When it is remote
D. Never
Rationale: Per ASC 450 (FASB Statement 5), a loss contingency must be accrued (recorded as
a liability and expense) if: (1) it is probable that a liability has been incurred, and (2) the amount
can be reasonably estimated. If probable but not estimable, disclosure is required. If reasonably
possible (more than remote but less than probable), disclosure is required. If remote, no
disclosure needed. This "probable and estimable" threshold is higher than for many other
accounting estimates.
Question 1.3
How are gain contingencies treated?
, . Accrued when probable
A
B. Disclosed when probable but never accrued until realized [CORRECT]
C. Accrued when reasonably possible
D. Ignored completely
Rationale: Gain contingencies are treated conservatively—they are never accrued (recognized
in income) until realized. Even if highly probable, gains are not recognized. If the gain is
probable, it may be disclosed in the notes, but care must be taken to avoid misleading
implications of realization. This asymmetry (losses accrued when probable, gains never accrued
until realized) reflects the conservatism constraint in accounting.
Question 1.4
What is the accounting for unearned revenue?
A. Recognize as revenue immediately when cash is received
B. Record as liability when cash received; recognize as revenue when performance obligation
satisfied [CORRECT]
C. Record as asset when cash received
D. Ignore until services are performed
Rationale: Unearned revenue (deferred revenue) is recorded as a liability when cash is received
because the company has an obligation to perform services or deliver goods in the future.
Revenue is recognized only when the performance obligation is satisfied (when goods/services
are provided). This follows the revenue recognition principle and creates a current or
non-current liability depending on the timing of performance.
Question 1.5
How are sales taxes payable recorded?
A. As revenue when collected
B. As a liability when collected from customers; remitted to government [CORRECT]
C. As an expense when collected
D. Ignored until paid to government
Rationale: Sales taxes collected from customers are recorded as Sales Tax Payable (a liability),
not revenue. The company acts as a collection agent for the government. When the tax is
remitted to the taxing authority, the liability is reduced. The entry when collecting: Debit Cash,
Credit Sales Revenue (net of tax) and Sales Tax Payable. Revenue is reported net of sales tax.
Question 1.6
What payroll taxes are employers required to match?
A. Federal income tax only
B. FICA (Social Security and Medicare) taxes [CORRECT]
C. Only state income tax
D. Only local taxes
Rationale: Employers must match employees' FICA taxes (Social Security 6.2% up to wage
base, Medicare 1.45% with no limit). Employers also pay federal and state unemployment taxes
(FUTA and SUTA). Federal income tax withheld is an employee obligation the employer remits
but does not match. The employer's payroll tax expense includes: matching FICA, FUTA, and
SUTA.
Question 1.7
How is the current portion of long-term debt classified?
, . As long-term liability
A
B. As current liability [CORRECT]
C. As stockholders' equity
D. As contra-asset
Rationale: The portion of long-term debt due within one year of the balance sheet date (or
operating cycle, if longer) is classified as a current liability. This includes principal payments due
within one year on notes, bonds, and mortgages. The remaining balance stays in long-term
liabilities. This classification is important for liquidity analysis and debt covenant compliance.
Question 1.8
What is a zero-interest-bearing note?
A. A note with no face value
B. A note where interest is implicit in the face amount [CORRECT]
C. A note with variable interest
D. A note that requires no repayment
Rationale: A zero-interest-bearing note has no stated interest rate, but interest is implicit in the
difference between face amount and present value (cash received). The note is recorded at
present value, with the discount amortized to interest expense over the note's life using the
effective interest method. For example, a $1,000 face note issued for $900 has $100 implicit
interest.
Question 1.9
How are compensated absences (vacation pay) accrued?
A. Never accrued
B. Accrued if the obligation is attributable to services already rendered, payment is probable,
and amount can be reasonably estimated [CORRECT]
C. Accrued only when taken
D. Accrued only for executives
Rationale: Per ASC 710, compensated absences (vacation, sick pay) are accrued as a liability
if: (1) the obligation is attributable to employees' services already rendered, (2) the rights vest or
accumulate, (3) payment is probable, and (4) the amount can be reasonably estimated. Sick
pay that doesn't vest (unused amounts lost) is not accrued. Vesting means the employee is
entitled to payment even if employment terminates.
Question 1.10
What disclosure is required for a reasonably possible loss contingency?
A. No disclosure
B. Disclosure of nature and estimated financial effect, or range of loss [CORRECT]
C. Accrual of the loss
D. Only disclosure if the amount is certain
Rationale: For reasonably possible loss contingencies (more than remote but less than
probable), disclosure is required of: (1) the nature of the contingency, and (2) an estimate of the
possible loss or range of loss, or a statement that such estimate cannot be made. This provides
users with information about risks that don't meet the accrual threshold but could materially
affect financial position.
[DOMAIN 2: LONG-TERM LIABILITIES (BONDS, NOTES) - 12 Questions]
Question 2.1
, hen are bonds issued at a discount?
W
A. When stated rate equals market rate
B. When stated rate is less than market rate [CORRECT]
C. When stated rate is greater than market rate
D. When bonds have no maturity date
Rationale: Bonds are issued at a discount when the stated (coupon) rate is less than the market
(effective) rate. Investors will pay less than face value to earn the market rate on their
investment. The discount represents additional interest that will be paid at maturity (difference
between cash received and face amount paid at maturity). The discount is amortized to interest
expense over the bond's life, increasing the effective interest rate to the market rate.
Question 2.2
How is bond interest expense calculated using the effective interest method?
A. Face value × Stated rate
B. Carrying value × Market rate [CORRECT]
C. Face value × Market rate
D. Issue price × Stated rate
Rationale: Under the effective interest method (required by GAAP), interest expense = Carrying
value of bonds at beginning of period × Market (effective) rate at issuance. Cash interest paid =
Face value × Stated rate. The difference amortizes the discount or premium. This method
produces a constant effective rate of interest and is theoretically superior to straight-line
amortization.
Question 2.3
What is the journal entry to issue bonds at a premium?
A. Debit Cash (face), Credit Bonds Payable (face)
B. Debit Cash (issue price), Credit Bonds Payable (face) and Premium on Bonds Payable
(difference) [CORRECT]
C. Debit Cash (face), Credit Bonds Payable (issue price)
D. Debit Discount, Credit Cash
Rationale: When bonds are issued at a premium (stated rate > market rate): Debit Cash for the
issue price (greater than face), Credit Bonds Payable for the face amount, and Credit Premium
on Bonds Payable for the excess. Premium on Bonds Payable is an adjunct liability account
(increases bonds payable). The premium will be amortized to reduce interest expense over the
bond's life.
Question 2.4
What happens to bond carrying value as a discount is amortized?
A. Decreases
B. Increases [CORRECT]
C. Stays the same
D. Becomes zero immediately
Rationale: For bonds issued at a discount, carrying value = Face value - Unamortized discount.
As discount is amortized (credited), the unamortized discount decreases, so carrying value
increases. At maturity, carrying value equals face value. For premium bonds, carrying value
decreases as premium is amortized. This "walking to par" reflects the accretion of value for
discount bonds.
