D104 Intermediate Accounting II - Set 3 - Part 1

Correct Answer: Debit cash, credit treasury stock, credit paid-in capital

When treasury stock is sold above cost, the cash account is debited, and both treasury stock and paid-in capital are credited for the difference between the selling price and the cost.

Correct Answer: Declining balance method

The declining balance method applies a constant depreciation rate to the declining book value of the asset without deducting the salvage value.

Correct Answer: Debit retained earnings, credit common stock and paid-in capital

A small stock dividend reduces retained earnings and increases common stock and paid-in capital accounts for the value of the distributed shares.

Correct Answer: When the carrying amount exceeds the fair value

Impairment losses are recognized when the carrying amount of an asset exceeds its fair value, indicating that the asset is not expected to recover its book value.

Correct Answer: Decreases stockholders’ equity

Treasury stock transactions reduce stockholders' equity because the company is buying back its own shares, decreasing the amount of equity in circulation.

Correct Answer: They are redeemed in installments

Serial bonds are structured to mature in installments, meaning the bond principal is repaid periodically over the bond's life.

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

When interest is paid on a bond issued at a discount, interest expense is debited for the total amount, and both cash and the discount account are credited.

Correct Answer: When the asset is held for disposal

Restoration of an impairment loss is only allowed if the asset is held for disposal, as future cash flows are uncertain for assets held for use.

Correct Answer: Has no effect on total stockholders’ equity

A stock split does not change the total stockholders' equity because it only increases the number of shares outstanding and reduces the par value per share.

Correct Answer: Net income - preferred dividends / weighted average shares outstanding

Basic earnings per share is calculated by subtracting preferred dividends from net income and dividing by the weighted average number of common shares outstanding.

Correct Answer: Return on assets

The return on assets ratio measures how effectively a company uses its assets to generate profit.

Correct Answer: Amortized over the life of the bond

Bond issuance costs are amortized over the life of the bond as an expense, rather than expensed immediately.

Correct Answer: As other comprehensive income

Unrealized gains and losses on available-for-sale securities are reported as part of other comprehensive income until they are realized.

Correct Answer: It results in the same depreciation expense each year

The straight-line method allocates an equal amount of depreciation expense to each period over the asset’s useful life.

Correct Answer: Recognized when realized

Contingent gains are not recognized in financial statements until they are realized, unlike contingent liabilities which can be recognized if probable and estimable.

Correct Answer: Capitalized as part of the depletion base

Development costs for natural resources are capitalized and included in the depletion base, along with other costs necessary for the resource extraction.

Correct Answer: Straight-line method

The straight-line method is appropriate for assets with consistent usage, as it allocates an equal depreciation expense over the asset's useful life.

Correct Answer: Debit amortization expense, credit accumulated amortization

Amortization of intangible assets is recorded by debiting amortization expense and crediting accumulated amortization, similar to depreciation for tangible assets.

Correct Answer: At the fair value of the land or stock, whichever is more determinable

When land is acquired in exchange for stock, the land should be recorded at the fair value of either the land or the stock, depending on which is more reliably determined.

Correct Answer: Damage from a natural disaster

Extraordinary gains or losses result from unusual and infrequent events, such as damage from a natural disaster, which are not part of the normal business operations.