D104 Intermediate Accounting II - Set 4 - Part 1

Correct Answer: Equal expense each year

The straight-line method allocates an equal amount of depreciation expense over the asset's useful life.

Correct Answer: Double-declining balance method

The double-declining balance method is an accelerated depreciation method, resulting in higher expenses in the early years.

Correct Answer: Net income - Preferred dividends / Average common stockholders' equity

Return on common stockholders' equity measures the profitability of a company in relation to the common stockholders’ equity.

Correct Answer: Retained earnings decrease

Stock dividends reduce retained earnings as they represent a distribution of additional shares to shareholders.

Correct Answer: Carrying value × effective interest rate

Under the effective-interest method, interest expense is calculated based on the carrying value of the bond multiplied by the effective interest rate.

Correct Answer: Recorded as a liability

Unredeemed gift certificates are considered a liability until they are used by customers.

Correct Answer: Debit bonds payable, debit loss on bond redemption, credit cash

A loss on bond redemption occurs when the reacquisition price exceeds the carrying amount of the bond.

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

A bond premium occurs when bonds are issued above face value, and the premium is recorded separately.

Correct Answer: Common stockholders' equity / Shares outstanding

Book value per share represents the equity available to common shareholders divided by the number of shares outstanding.

Correct Answer: Callable bonds

Callable bonds give the issuer the right to redeem the bonds before the maturity date, often at a premium.

Correct Answer: They are recorded in the financial statements as a liability

Contingent liabilities that are probable and can be reasonably estimated are recorded as liabilities in the financial statements.

Correct Answer: The carrying value increases

As the discount is amortized, the carrying value of the bond increases until it reaches face value at maturity.

Correct Answer: (Net income + Interest expense + Income tax expense) / Interest expense

The times interest earned ratio measures a company’s ability to cover its interest expenses from earnings before interest and taxes.

Correct Answer: Units-of-production method

The units-of-production method allocates depreciation based on the asset's usage or production rather than the passage of time.

Correct Answer: Tested annually for impairment

Goodwill is not amortized but must be tested annually for impairment to ensure its carrying value does not exceed its fair value.

Correct Answer: Decreases the par value per share

A 2-for-1 stock split doubles the number of shares outstanding while halving the par value per share, leaving total equity unchanged.

Correct Answer: Net income - Preferred dividends / Weighted average shares outstanding

EPS measures the portion of a company's profit allocated to each outstanding share of common stock.

Correct Answer: In the footnotes

Dividends in arrears on cumulative preferred stock are disclosed in the footnotes to the financial statements until they are declared.

Correct Answer: Increases interest expense over time

Amortizing a bond discount increases interest expense because the discount represents additional cost over the life of the bond.

Correct Answer: Expensed over the service period

Stock-based compensation is expensed over the service period, which is the period the employees are providing services in exchange for the options.