WGU D104 Intermediate Accounting II FINAL EXAM -
2026 PRACTICE VERSION
Questions with Answers and Detailed Rationales
1. Which of the following best describes the conceptual framework's approach to revenue recognition
under ASC 606?
A) Revenue is recognized when cash is received from customers B) Revenue is recognized when earned
and realizable, regardless of cash flow C) Revenue is recognized when control of goods or services
transfers to the customer D) Revenue is recognized at the point of shipment for all transactions
ANSWERC
Rationale for Option A: Incorrect. The cash basis of accounting is not GAAP for most businesses; ASC
606 uses an accrual-based, control-transfer model, not cash receipt timing.
Rationale for Option B: Incorrect. While "earned and realizable" was the older guidance (ASC 605), ASC
606 replaced this with a five-step model centered on transfer of control, making this option outdated.
Rationale for Option C: Correct. ASC 606 requires entities to recognize revenue when (or as) they satisfy
performance obligations by transferring control of promised goods or services to customers.
Rationale for Option D: Incorrect. Shipment point may indicate transfer of control in some cases, but
ASC 606 requires analysis of when control transfers, which could be at delivery, acceptance, or over
time—not automatically at shipment.
2. A company issues bonds with a face value of $500,000 at 98. The journal entry to record the
issuance will include:
A) Debit to Cash for $500,000 B) Credit to Bonds Payable for $490,000 C) Debit to Discount on Bonds
Payable for $10,000 D) Credit to Premium on Bonds Payable for $10,000
ANSWERC
Rationale for Option A: Incorrect. Cash received is $500,000 × 98% = $490,000, not the full face value.
The debit to Cash should reflect the actual proceeds.
Rationale for Option B: Incorrect. Bonds Payable is always credited at face value ($500,000), not the
issue price. The difference is recorded in a contra or adjunct account.
,Rationale for Option C: Correct. The bonds were issued at a discount: $500,000 - $490,000 = $10,000.
This discount is debited to "Discount on Bonds Payable," a contra-liability account.
Rationale for Option D: Incorrect. A premium occurs when bonds sell above face value (e.g., at 102).
Here, bonds sold below face value (at 98), creating a discount, not a premium.
3. Under the effective interest method of amortizing bond discount, interest expense:
A) Remains constant over the life of the bond B) Decreases over the life of the bond C) Increases over
the life of the bond D) Is calculated using the stated rate multiplied by face value
ANSWERC
Rationale for Option A: Incorrect. Constant interest expense occurs only under the straight-line method,
which is not preferred under GAAP unless results are not materially different.
Rationale for Option B: Incorrect. For bonds issued at a discount, the carrying value increases over time
as the discount amortizes, causing interest expense (carrying value × market rate) to increase, not
decrease.
Rationale for Option C: Correct. With a bond discount, the carrying value starts below face value and
increases toward face value. Since interest expense = carrying value × effective (market) rate, expense
increases each period.
Rationale for Option D: Incorrect. This describes cash interest paid (stated rate × face value), not
interest expense. Interest expense under the effective interest method uses the market rate × carrying
value.
4. Which of the following is NOT a criterion for classifying a lease as a finance lease under ASC 842?
A) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term B)
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to exercise C) The present value of lease payments equals or exceeds substantially all of the fair
value of the underlying asset D) The lease term is for a major part of the remaining economic life of the
underlying asset, regardless of the asset's fair value
ANSWERD
Rationale for Option A: Incorrect. This IS a finance lease criterion: transfer of ownership by end of lease
term indicates the lessee effectively acquires the asset.
Rationale for Option B: Incorrect. This IS a criterion: a purchase option reasonably certain to be
exercised suggests the lessee will obtain ownership, characteristic of a finance lease.
Rationale for Option C: Incorrect. This IS a criterion: if PV of payments ≥ substantially all (typically 90%)
of fair value, the lessee is financing most of the asset's cost.
,Rationale for Option D: Correct. While "major part of remaining economic life" (typically 75%) is a
criterion, the phrase "regardless of the asset's fair value" makes this statement inaccurate. The test
considers both time AND value; also, this option misstates the criterion by omitting that it's one of five
tests, not standalone regardless of other factors. More precisely, D is worded to be misleading—the
actual criterion is "lease term is for the major part of the remaining economic life of the underlying
asset," without the "regardless" clause, making D the best choice for "NOT a criterion" as written.
5. When a company accounts for an investment in equity securities with no significant influence,
which measurement attribute is used?
A) Amortized cost B) Fair value through net income (FV-NI) C) Equity method D) Lower of cost or market
ANSWERB
Rationale for Option A: Incorrect. Amortized cost applies to debt securities held to collect contractual
cash flows, not equity securities without significant influence.
Rationale for Option B: Correct. Under ASC 321, equity investments without significant influence
(typically <20% ownership) are measured at fair value with changes recognized in net income (FV-NI),
unless the practical expedient for certain investments is elected.
Rationale for Option C: Incorrect. The equity method is used when the investor has significant influence
(typically 20%-50% ownership), which the question explicitly excludes.
Rationale for Option D: Incorrect. "Lower of cost or market" was used for certain inventory and older
equity investment guidance but was replaced by fair value measurement for equity securities under ASU
2016-01.
6. A contingent liability should be accrued in the financial statements when:
A) It is possible that a loss has been incurred and the amount can be reasonably estimated B) It is
probable that a loss has been incurred and the amount can be reasonably estimated C) It is reasonably
possible that a loss has been incurred, regardless of estimability D) Management believes a loss may
occur in the future
ANSWERB
Rationale for Option A: Incorrect. "Possible" (more than remote but less than probable) requires
disclosure only, not accrual. Accrual requires a higher threshold.
Rationale for Option B: Correct. ASC 450 requires accrual of a loss contingency when (1) it is probable
that a liability has been incurred AND (2) the amount can be reasonably estimated.
Rationale for Option C: Incorrect. "Reasonably possible" contingencies require footnote disclosure but
not accrual. Estimability alone is insufficient without probability.
, Rationale for Option D: Incorrect. Management's belief about future possibilities is too subjective;
GAAP requires objective assessment of probability and estimability for accrual.
7. Which of the following best describes the treatment of deferred tax assets?
A) They are always recognized in full regardless of future profitability B) They are recognized only if it is
more likely than not that they will be realized C) They are offset against deferred tax liabilities on the
balance sheet without valuation allowance consideration D) They are amortized over a 15-year period
for tax purposes
ANSWERB
Rationale for Option A: Incorrect. Deferred tax assets are subject to a valuation allowance if it is more
likely than not (greater than 50%) that some portion or all will not be realized.
Rationale for Option B: Correct. ASC 740 requires that deferred tax assets be reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some or all of the asset will not
be realized.
Rationale for Option C: Incorrect. While deferred tax assets and liabilities can be netted by jurisdiction,
the valuation allowance assessment is still required before netting; they are not automatically offset
without consideration of realizability.
Rationale for Option D: Incorrect. Deferred tax assets are not amortized; they reverse as temporary
differences reverse. The 15-year reference may confuse with tax amortization of goodwill under IRC
§197, which is unrelated.
8. In computing diluted earnings per share, which of the following securities would be antidilutive and
thus excluded?
A) Stock options with an exercise price below the average market price B) Convertible preferred stock
that would increase EPS if converted C) Warrants that would result in additional shares at a price below
market D) Convertible bonds that would decrease EPS if converted
ANSWERB
Rationale for Option A: Incorrect. Options with exercise price < market price are dilutive under the
treasury stock method and included in diluted EPS.
Rationale for Option B: Correct. If converting a security would increase EPS (or decrease loss per share),
it is antidilutive and excluded from diluted EPS calculation per ASC 260.
Rationale for Option C: Incorrect. Warrants with exercise price below market price are dilutive and
included using the treasury stock method.
Rationale for Option D: Incorrect. Convertible bonds that decrease EPS when converted are dilutive and
included using the if-converted method.
2026 PRACTICE VERSION
Questions with Answers and Detailed Rationales
1. Which of the following best describes the conceptual framework's approach to revenue recognition
under ASC 606?
A) Revenue is recognized when cash is received from customers B) Revenue is recognized when earned
and realizable, regardless of cash flow C) Revenue is recognized when control of goods or services
transfers to the customer D) Revenue is recognized at the point of shipment for all transactions
ANSWERC
Rationale for Option A: Incorrect. The cash basis of accounting is not GAAP for most businesses; ASC
606 uses an accrual-based, control-transfer model, not cash receipt timing.
Rationale for Option B: Incorrect. While "earned and realizable" was the older guidance (ASC 605), ASC
606 replaced this with a five-step model centered on transfer of control, making this option outdated.
Rationale for Option C: Correct. ASC 606 requires entities to recognize revenue when (or as) they satisfy
performance obligations by transferring control of promised goods or services to customers.
Rationale for Option D: Incorrect. Shipment point may indicate transfer of control in some cases, but
ASC 606 requires analysis of when control transfers, which could be at delivery, acceptance, or over
time—not automatically at shipment.
2. A company issues bonds with a face value of $500,000 at 98. The journal entry to record the
issuance will include:
A) Debit to Cash for $500,000 B) Credit to Bonds Payable for $490,000 C) Debit to Discount on Bonds
Payable for $10,000 D) Credit to Premium on Bonds Payable for $10,000
ANSWERC
Rationale for Option A: Incorrect. Cash received is $500,000 × 98% = $490,000, not the full face value.
The debit to Cash should reflect the actual proceeds.
Rationale for Option B: Incorrect. Bonds Payable is always credited at face value ($500,000), not the
issue price. The difference is recorded in a contra or adjunct account.
,Rationale for Option C: Correct. The bonds were issued at a discount: $500,000 - $490,000 = $10,000.
This discount is debited to "Discount on Bonds Payable," a contra-liability account.
Rationale for Option D: Incorrect. A premium occurs when bonds sell above face value (e.g., at 102).
Here, bonds sold below face value (at 98), creating a discount, not a premium.
3. Under the effective interest method of amortizing bond discount, interest expense:
A) Remains constant over the life of the bond B) Decreases over the life of the bond C) Increases over
the life of the bond D) Is calculated using the stated rate multiplied by face value
ANSWERC
Rationale for Option A: Incorrect. Constant interest expense occurs only under the straight-line method,
which is not preferred under GAAP unless results are not materially different.
Rationale for Option B: Incorrect. For bonds issued at a discount, the carrying value increases over time
as the discount amortizes, causing interest expense (carrying value × market rate) to increase, not
decrease.
Rationale for Option C: Correct. With a bond discount, the carrying value starts below face value and
increases toward face value. Since interest expense = carrying value × effective (market) rate, expense
increases each period.
Rationale for Option D: Incorrect. This describes cash interest paid (stated rate × face value), not
interest expense. Interest expense under the effective interest method uses the market rate × carrying
value.
4. Which of the following is NOT a criterion for classifying a lease as a finance lease under ASC 842?
A) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term B)
The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably
certain to exercise C) The present value of lease payments equals or exceeds substantially all of the fair
value of the underlying asset D) The lease term is for a major part of the remaining economic life of the
underlying asset, regardless of the asset's fair value
ANSWERD
Rationale for Option A: Incorrect. This IS a finance lease criterion: transfer of ownership by end of lease
term indicates the lessee effectively acquires the asset.
Rationale for Option B: Incorrect. This IS a criterion: a purchase option reasonably certain to be
exercised suggests the lessee will obtain ownership, characteristic of a finance lease.
Rationale for Option C: Incorrect. This IS a criterion: if PV of payments ≥ substantially all (typically 90%)
of fair value, the lessee is financing most of the asset's cost.
,Rationale for Option D: Correct. While "major part of remaining economic life" (typically 75%) is a
criterion, the phrase "regardless of the asset's fair value" makes this statement inaccurate. The test
considers both time AND value; also, this option misstates the criterion by omitting that it's one of five
tests, not standalone regardless of other factors. More precisely, D is worded to be misleading—the
actual criterion is "lease term is for the major part of the remaining economic life of the underlying
asset," without the "regardless" clause, making D the best choice for "NOT a criterion" as written.
5. When a company accounts for an investment in equity securities with no significant influence,
which measurement attribute is used?
A) Amortized cost B) Fair value through net income (FV-NI) C) Equity method D) Lower of cost or market
ANSWERB
Rationale for Option A: Incorrect. Amortized cost applies to debt securities held to collect contractual
cash flows, not equity securities without significant influence.
Rationale for Option B: Correct. Under ASC 321, equity investments without significant influence
(typically <20% ownership) are measured at fair value with changes recognized in net income (FV-NI),
unless the practical expedient for certain investments is elected.
Rationale for Option C: Incorrect. The equity method is used when the investor has significant influence
(typically 20%-50% ownership), which the question explicitly excludes.
Rationale for Option D: Incorrect. "Lower of cost or market" was used for certain inventory and older
equity investment guidance but was replaced by fair value measurement for equity securities under ASU
2016-01.
6. A contingent liability should be accrued in the financial statements when:
A) It is possible that a loss has been incurred and the amount can be reasonably estimated B) It is
probable that a loss has been incurred and the amount can be reasonably estimated C) It is reasonably
possible that a loss has been incurred, regardless of estimability D) Management believes a loss may
occur in the future
ANSWERB
Rationale for Option A: Incorrect. "Possible" (more than remote but less than probable) requires
disclosure only, not accrual. Accrual requires a higher threshold.
Rationale for Option B: Correct. ASC 450 requires accrual of a loss contingency when (1) it is probable
that a liability has been incurred AND (2) the amount can be reasonably estimated.
Rationale for Option C: Incorrect. "Reasonably possible" contingencies require footnote disclosure but
not accrual. Estimability alone is insufficient without probability.
, Rationale for Option D: Incorrect. Management's belief about future possibilities is too subjective;
GAAP requires objective assessment of probability and estimability for accrual.
7. Which of the following best describes the treatment of deferred tax assets?
A) They are always recognized in full regardless of future profitability B) They are recognized only if it is
more likely than not that they will be realized C) They are offset against deferred tax liabilities on the
balance sheet without valuation allowance consideration D) They are amortized over a 15-year period
for tax purposes
ANSWERB
Rationale for Option A: Incorrect. Deferred tax assets are subject to a valuation allowance if it is more
likely than not (greater than 50%) that some portion or all will not be realized.
Rationale for Option B: Correct. ASC 740 requires that deferred tax assets be reduced by a valuation
allowance if, based on available evidence, it is more likely than not that some or all of the asset will not
be realized.
Rationale for Option C: Incorrect. While deferred tax assets and liabilities can be netted by jurisdiction,
the valuation allowance assessment is still required before netting; they are not automatically offset
without consideration of realizability.
Rationale for Option D: Incorrect. Deferred tax assets are not amortized; they reverse as temporary
differences reverse. The 15-year reference may confuse with tax amortization of goodwill under IRC
§197, which is unrelated.
8. In computing diluted earnings per share, which of the following securities would be antidilutive and
thus excluded?
A) Stock options with an exercise price below the average market price B) Convertible preferred stock
that would increase EPS if converted C) Warrants that would result in additional shares at a price below
market D) Convertible bonds that would decrease EPS if converted
ANSWERB
Rationale for Option A: Incorrect. Options with exercise price < market price are dilutive under the
treasury stock method and included in diluted EPS.
Rationale for Option B: Correct. If converting a security would increase EPS (or decrease loss per share),
it is antidilutive and excluded from diluted EPS calculation per ASC 260.
Rationale for Option C: Incorrect. Warrants with exercise price below market price are dilutive and
included using the treasury stock method.
Rationale for Option D: Incorrect. Convertible bonds that decrease EPS when converted are dilutive and
included using the if-converted method.
