D104 Intermediate Accounting II - Set 4 - Part 2

Correct Answer: Paid-in capital increases

When treasury stock is sold above cost, the excess is credited to paid-in capital from treasury stock transactions.

Correct Answer: Debit retained earnings, credit treasury stock

A loss on the sale of treasury stock is debited to retained earnings if there is no balance in the paid-in capital account for treasury stock transactions.

Correct Answer: Debit depletion expense, credit accumulated depletion

Depletion expense is recorded to allocate the cost of natural resources over their useful life, similar to depreciation.

Correct Answer: For assets held for disposal

The restoration of an impairment loss is permitted only for assets held for disposal because they are not being actively used in operations.

Correct Answer: Expensed in the period incurred

R&D costs are expensed as incurred because their future benefits are uncertain and cannot be capitalized.

Correct Answer: To decrease interest expense

Amortizing bond premiums reduces interest expense, as the premium represents income received in advance by the issuer.

Correct Answer: It cannot be converted into common stock

Nonconvertible preferred stock cannot be converted into common stock, unlike convertible preferred stock.

Correct Answer: No effect on stockholders' equity

A stock split increases the number of shares and decreases the par value per share but does not affect total stockholders' equity.

Correct Answer: The carrying value decreases

As the bond premium is amortized, the carrying value decreases over time until it reaches face value at maturity.

Correct Answer: Not amortized, but tested annually for impairment

Intangible assets with indefinite lives, such as goodwill, are not amortized but must be tested for impairment annually.

Correct Answer: Nonconvertible preferred stock

Nonconvertible preferred stock cannot be converted into common stock and therefore cannot dilute earnings per share.

Correct Answer: Interest is paid at maturity

Zero-coupon bonds do not pay interest periodically but are issued at a discount and pay the face value at maturity, including the accrued interest.

Correct Answer: To assess a company's liquidity

The acid-test ratio (or quick ratio) measures a company's ability to meet its short-term obligations with its most liquid assets.

Correct Answer: Bonds payable is debited, and common stock is credited

When convertible bonds are converted into common stock, the carrying value of the bonds is removed, and common stock is issued.

Correct Answer: Current assets / Current liabilities

The current ratio measures a companys ability to pay off its short-term obligations using its current assets.

Correct Answer: To represent future tax payments

Deferred tax liabilities arise when taxable income is less than financial income due to temporary differences and represent future tax obligations.

Correct Answer: Double-declining balance method

The double-declining balance method is an accelerated method, resulting in higher depreciation expenses in the earlier years of an asset's life.

Correct Answer: They are recognized as a liability when the product is sold

Warranty liabilities are recorded when the product is sold, as the future costs can be reasonably estimated at that time.

Correct Answer: Debit bonds payable, credit gain on bond redemption

A gain on bond redemption is recorded when the reacquisition price is less than the carrying value of the bond.

Correct Answer: Increases stockholders' equity

Issuing stock options increases stockholders' equity by adding to paid-in capital as the options are exercised or vest.