D104 Intermediate Accounting II - Set 5 - Part 2

Correct Answer: When the bond and the warrant can be traded separately

Stock warrants are accounted for separately when they can be traded independently from the bond.

Correct Answer: To align the carrying value of the bond with its face value at maturity

The amortization of bond premiums or discounts is done to ensure that the bonds carrying value reaches its face value by maturity.

Correct Answer: Based on the units-of-production method

Depletion expenses are calculated using the units-of-production method, which allocates costs based on resource extraction.

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

When treasury stock is sold above its cost, cash is debited, treasury stock is credited for its cost, and any excess is credited to additional paid-in capital.

Correct Answer: Total stockholders equity remains unchanged

A small stock dividend transfers amounts between retained earnings and paid-in capital, but total stockholders' equity remains unchanged.

Correct Answer: Straight-line method

The activity method, also called the units-of-production method, depreciates an asset based on how much it is used rather than over a fixed period of time.

Correct Answer: For all tangible assets

Restoration of an impairment loss is only permitted for assets held for disposal, as they are remeasured at the lower of cost or net realizable value.

Correct Answer: Purchase price + Development costs - Salvage value

The depletion base for natural resources includes acquisition, exploration, development costs, and restoration costs, minus the salvage value.

Correct Answer: (Total estimated units - Salvage value) / Total units to be recovered

The depletion rate is calculated by dividing the depletion base, less any salvage value, by the total recoverable units of the natural resource.

Correct Answer: Zero-coupon bond

A term bond has regular interest payments and pays the face value in a lump sum at maturity.

Correct Answer: Debit impairment loss, credit accumulated depreciation

Impairment losses reduce the carrying amount of the asset, which is usually done by increasing accumulated depreciation, with the loss recorded in the income statement.

Correct Answer: Activity method

The double-declining balance method accelerates depreciation by applying a constant rate, which is usually twice the straight-line rate, to the declining book value of the asset.

Correct Answer: Debit accumulated depreciation and equipment

When equipment is sold, the cash received is debited, and the equipment's cost and accumulated depreciation are credited, with any gain recognized.

Correct Answer: Group method

The composite method is used when assets are heterogeneous and have different useful lives, allowing them to be depreciated together.

Correct Answer: Par value remains the same

In a 2-for-1 stock split, the number of shares outstanding doubles, and the par value of the stock is reduced by half.

Correct Answer: It is debited to balance the entry

If treasury stock is sold for less than its cost, the difference is debited from Additional Paid-in Capital.

Correct Answer: Loss on redemption

If bonds are redeemed at a price lower than the carrying value, the company recognizes a gain on redemption.

Correct Answer: Debit interest expense, credit bonds payable

Accrued interest is recorded by debiting interest expense and crediting interest payable, recognizing the obligation to pay interest.

Correct Answer: Write off the entire asset

When the carrying amount of an asset exceeds its undiscounted future cash flows, an impairment loss must be recognized.

Correct Answer: When the reacquisition price is greater than the carrying amount

A gain is recorded when bonds are redeemed for less than their carrying amount.