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WGU D104 (Intermediate Accounting II)
Part 1: Bonds and Long-Term Liabilities (Questions 1-20)
1. Q: What is the primary difference between a bond issued at a premium versus a discount?
A: A premium occurs when the stated rate is higher than the market rate; a discount occurs
when the stated rate is lower than the market rate.
Explanation: Investors pay more for a higher coupon rate (premium) and less for a lower
coupon rate (discount) to align with market demand.
2. Q: Under GAAP, what method must be used to amortize bond discount or premium?
A: The Effective-Interest Method.
Explanation: While the straight-line method is simpler, GAAP requires the effective-interest
method because it produces a constant rate of interest over the bond's life.
3. Q: If bonds are issued with detachable stock warrants, how is the proceeds allocated?
A: Proceeds are allocated between the bonds and the warrants based on their relative fair
market values.
Explanation: Detachable warrants can be traded separately, making them a separate
financial instrument that must be valued independently.
4. Q: What is the journal entry to record the issuance of bonds at a discount?
A: Debit Cash, Debit Discount on Bonds Payable, Credit Bonds Payable.
Explanation: Discount is a contra-liability account, reducing the carrying amount of the
bonds.
5. Q: When amortizing a bond discount using the effective-interest method, what happens to
the carrying value of the bond over time?
A: The carrying value increases.
Explanation: The discount amortization reduces the discount balance, increasing the net
carrying value toward par value at maturity.
6. Q: When amortizing a bond premium using the effective-interest method, what happens to
the interest expense over time?
A: Interest expense decreases.
Explanation: As the premium is amortized, the carrying value decreases, causing the interest
expense (carrying value × market rate) to decrease.
7. Q: How should bond issuance costs be treated under GAAP?
A: They are deducted from the carrying amount of the liability and amortized using the
effective-interest method.
Explanation: Similar to a discount, these costs reduce the net proceeds and increase the
effective interest rate.
8. Q: What is a "troubled debt restructuring"?
A: A situation where a creditor grants concessions to a debtor due to the debtor's financial
difficulties.
Explanation: Examples include reducing the interest rate, extending maturity, or reducing the
principal.
9. Q: In a troubled debt restructuring involving a settlement, how is the gain/loss measured?
A: The difference between the carrying amount of the payable and the fair value of the
assets transferred.
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Explanation: The debtor must recognize a gain on restructuring.
10. Q: What is the "carrying value" of a bond?
A: The face amount of the bond plus/minus any unamortized premium/discount.
Explanation: It represents the net amount owed to bondholders at a specific point in time.
(Questions 11-20 cover specific bond redemption scenarios, zero-coupon bonds, and
embedded options in D104 study materials).
Part 2: Lease Accounting (Questions 21-40)
21. Q: What are the two types of leases for a lessee?
A: Operating Lease and Finance Lease.
Explanation: Finance leases (formerly capital leases) transfer ownership or control, while
operating leases are similar to renting.
22. Q: What are the two types of leases for a lessor?
A: Operating Lease, Sales-Type Lease, and Direct Financing Lease.
Explanation: Lessors classify leases based on risk/reward transfer.
23. Q: Which of the following is NOT a criterion for a finance lease for a lessee?
A: The lease term is 50% of the asset's life.
Explanation: Criteria include: Ownership transfer, bargain purchase option, term >= 75% of
life, or PV of payments >= 90% of FMV.
24. Q: How does a lessee record an operating lease?
A: Debit Right-of-Use (ROU) Asset, Credit Lease Liability.
Explanation: Almost all leases are now on the balance sheet, but operating leases recognize
a single lease cost.
25. Q: How is the ROU asset amortized in a finance lease?
A: Straight-line over the lease term.
Explanation: The expense consists of interest on liability + amortization of the ROU asset.
26. Q: What is a "bargain purchase option"?
A: A provision allowing the lessee to purchase the asset at a price significantly lower than
expected fair value.
Explanation: This criterion makes the lease more likely to be classified as a finance lease.
27. Q: How does a lessor record a sales-type lease?
A: Lease Receivable is recorded, and the asset is removed from the books, with a gain or
loss recognized.
Explanation: The lessor essentially sells the asset.
28. Q: What is initial direct cost in a lease?
A: Costs incurred by the lessor to negotiate and arrange a lease agreement.
Explanation: These are typically capitalized and deferred over the lease term.
29. Q: What is an "operating lease" expense for a lessee?
A: Lease expense is recognized on a straight-line basis over the lease term.
Explanation: The ROU asset amortization and interest are not separated; only a single
expense line.
30. Q: What is a "residual value"?
A: The estimated fair value of the leased asset at the end of the lease term.
Explanation: This affects the calculation of the lease payment and ROU asset.
(Questions 31-40 cover lease modifications, sale-leaseback transactions, and lessor/lessee
accounting variations).
WGU D104 (Intermediate Accounting II)
Part 1: Bonds and Long-Term Liabilities (Questions 1-20)
1. Q: What is the primary difference between a bond issued at a premium versus a discount?
A: A premium occurs when the stated rate is higher than the market rate; a discount occurs
when the stated rate is lower than the market rate.
Explanation: Investors pay more for a higher coupon rate (premium) and less for a lower
coupon rate (discount) to align with market demand.
2. Q: Under GAAP, what method must be used to amortize bond discount or premium?
A: The Effective-Interest Method.
Explanation: While the straight-line method is simpler, GAAP requires the effective-interest
method because it produces a constant rate of interest over the bond's life.
3. Q: If bonds are issued with detachable stock warrants, how is the proceeds allocated?
A: Proceeds are allocated between the bonds and the warrants based on their relative fair
market values.
Explanation: Detachable warrants can be traded separately, making them a separate
financial instrument that must be valued independently.
4. Q: What is the journal entry to record the issuance of bonds at a discount?
A: Debit Cash, Debit Discount on Bonds Payable, Credit Bonds Payable.
Explanation: Discount is a contra-liability account, reducing the carrying amount of the
bonds.
5. Q: When amortizing a bond discount using the effective-interest method, what happens to
the carrying value of the bond over time?
A: The carrying value increases.
Explanation: The discount amortization reduces the discount balance, increasing the net
carrying value toward par value at maturity.
6. Q: When amortizing a bond premium using the effective-interest method, what happens to
the interest expense over time?
A: Interest expense decreases.
Explanation: As the premium is amortized, the carrying value decreases, causing the interest
expense (carrying value × market rate) to decrease.
7. Q: How should bond issuance costs be treated under GAAP?
A: They are deducted from the carrying amount of the liability and amortized using the
effective-interest method.
Explanation: Similar to a discount, these costs reduce the net proceeds and increase the
effective interest rate.
8. Q: What is a "troubled debt restructuring"?
A: A situation where a creditor grants concessions to a debtor due to the debtor's financial
difficulties.
Explanation: Examples include reducing the interest rate, extending maturity, or reducing the
principal.
9. Q: In a troubled debt restructuring involving a settlement, how is the gain/loss measured?
A: The difference between the carrying amount of the payable and the fair value of the
assets transferred.
, 2
Explanation: The debtor must recognize a gain on restructuring.
10. Q: What is the "carrying value" of a bond?
A: The face amount of the bond plus/minus any unamortized premium/discount.
Explanation: It represents the net amount owed to bondholders at a specific point in time.
(Questions 11-20 cover specific bond redemption scenarios, zero-coupon bonds, and
embedded options in D104 study materials).
Part 2: Lease Accounting (Questions 21-40)
21. Q: What are the two types of leases for a lessee?
A: Operating Lease and Finance Lease.
Explanation: Finance leases (formerly capital leases) transfer ownership or control, while
operating leases are similar to renting.
22. Q: What are the two types of leases for a lessor?
A: Operating Lease, Sales-Type Lease, and Direct Financing Lease.
Explanation: Lessors classify leases based on risk/reward transfer.
23. Q: Which of the following is NOT a criterion for a finance lease for a lessee?
A: The lease term is 50% of the asset's life.
Explanation: Criteria include: Ownership transfer, bargain purchase option, term >= 75% of
life, or PV of payments >= 90% of FMV.
24. Q: How does a lessee record an operating lease?
A: Debit Right-of-Use (ROU) Asset, Credit Lease Liability.
Explanation: Almost all leases are now on the balance sheet, but operating leases recognize
a single lease cost.
25. Q: How is the ROU asset amortized in a finance lease?
A: Straight-line over the lease term.
Explanation: The expense consists of interest on liability + amortization of the ROU asset.
26. Q: What is a "bargain purchase option"?
A: A provision allowing the lessee to purchase the asset at a price significantly lower than
expected fair value.
Explanation: This criterion makes the lease more likely to be classified as a finance lease.
27. Q: How does a lessor record a sales-type lease?
A: Lease Receivable is recorded, and the asset is removed from the books, with a gain or
loss recognized.
Explanation: The lessor essentially sells the asset.
28. Q: What is initial direct cost in a lease?
A: Costs incurred by the lessor to negotiate and arrange a lease agreement.
Explanation: These are typically capitalized and deferred over the lease term.
29. Q: What is an "operating lease" expense for a lessee?
A: Lease expense is recognized on a straight-line basis over the lease term.
Explanation: The ROU asset amortization and interest are not separated; only a single
expense line.
30. Q: What is a "residual value"?
A: The estimated fair value of the leased asset at the end of the lease term.
Explanation: This affects the calculation of the lease payment and ROU asset.
(Questions 31-40 cover lease modifications, sale-leaseback transactions, and lessor/lessee
accounting variations).
