D104 Intermediate Accounting II - Set 2 - Part 1

Correct Answer: Unearned revenue

Unearned revenue arises when a company receives payment before delivering goods or services, creating a liability to fulfill the obligation in the future.

Correct Answer: Activity method

The activity method allocates depreciation based on actual usage or production, making it suitable for assets where usage varies significantly over time.

Correct Answer: Current ratio

The current ratio is calculated by dividing current assets by current liabilities and reflects a company’s ability to cover short-term obligations.

Correct Answer: Allocating proceeds between bond and equity based on their relative fair values

The proportional method is used when both bond and equity securities are issued, allocating proceeds based on their relative fair market values.

Correct Answer: Carrying value minus impairment loss

After recognizing an impairment, the asset’s carrying value is reduced by the impairment loss, representing its new book value.

Correct Answer: Debit cash, credit sales revenue and sales tax payable

When recording sales tax, the sales revenue and the sales tax payable are both credited, while cash is debited for the total amount received.

Correct Answer: To determine the percentage of assets financed by debt

The debt to assets ratio shows what proportion of a company’s assets is financed through debt, helping assess financial leverage.

Correct Answer: Double declining balance

The double declining balance method accelerates depreciation, resulting in higher expenses in the early years and lower charges in later years.

Correct Answer: Capitalized as part of the asset’s cost

Interest costs incurred during the construction of a long-term asset are capitalized and added to the asset’s cost, not expensed immediately.

Correct Answer: It charges the same amount of depreciation every year

The straight-line method allocates the same amount of depreciation every year over the asset’s useful life.

Correct Answer: 25%

The profit margin is calculated by dividing net income by net sales, resulting in a profit margin of 25% ($500,000 ÷ $2,000,000).

Correct Answer: Debit cash and discount on bonds payable, credit bonds payable

When a bond is issued at a discount, the cash received is less than the face value, so the discount is debited along with cash.

Correct Answer: Expensed when a product is sold

Product warranties are accrued as a liability and expensed when the related product is sold, based on estimates of future claims.

Correct Answer: Debit interest expense, credit cash

Bond interest payments are recorded by debiting interest expense and crediting cash when the payment is made.

Correct Answer: Acquisition cost plus exploration, development, and restoration costs

The depletion base for natural resources includes the acquisition cost as well as costs for exploration, development, and restoration.

Correct Answer: Intangible assets with finite lives are amortized

Intangible assets with finite lives are amortized over their useful lives, whereas intangible assets with indefinite lives are not amortized.

Correct Answer: By comparing the carrying amount to the fair value of the reporting unit

Goodwill impairment is tested by comparing the carrying amount of a reporting unit to its fair value; if the carrying amount exceeds fair value, impairment is recognized.

Correct Answer: Net sales / average total assets

Asset turnover measures how efficiently a company uses its assets to generate sales, calculated by dividing net sales by average total assets.

Correct Answer: Double-declining balance method

The double-declining balance method applies a constant depreciation rate to the declining book value of the asset each year, resulting in accelerated depreciation.

Correct Answer: Debit cash, credit bonds payable and premium on bonds payable

When bonds are issued at a premium, the premium is credited along with bonds payable, and the cash account is debited for the amount received.