Certified Management Accountant Financial Reporting 5 — Questions and Answers
Question 1: A company issues 1,000 shares of $10 par value stock at $25 per share. What is the credit to additional paid-in capital?
- $10,000
- $15,000 (Correct answer)
- $25,000
- $35,000
Correct answer: $15,000
Additional paid-in capital equals the excess over par: ($25 − $10) × 1,000 shares = $15,000.
Question 2: Which of the following is an example of a temporary difference that creates a deferred tax LIABILITY?
- Warranty expense accrued for book but not yet deductible for tax
- Subscription revenue received and taxed but not yet earned for book purposes
- Accelerated depreciation taken for tax exceeding straight-line book depreciation (Correct answer)
- Bad debt expense recognized for book before it is deductible for tax
Correct answer: Accelerated depreciation taken for tax exceeding straight-line book depreciation
Accelerated tax depreciation reduces taxable income now but book income will be lower in the future, creating a deferred tax liability for taxes owed later.
Question 3: Under GAAP, which of the following costs related to internally developed software must be EXPENSED as incurred?
- Costs during the application development stage
- Costs of coding and testing once technological feasibility is established
- Costs during the preliminary project stage (Correct answer)
- Costs of data conversion utilities
Correct answer: Costs during the preliminary project stage
Under ASC 350-40, costs in the preliminary project stage (feasibility assessment, conceptual evaluation) must be expensed as incurred.
Question 4: A company has 10,000 stock options outstanding with an exercise price of $20 when the average market price is $25. Under the treasury stock method, how many incremental shares are added to diluted EPS?
- 10,000
- 8,000
- 2,000 (Correct answer)
- 0
Correct answer: 2,000
Treasury stock method: 10,000 options exercised − (10,000 × $20 / $25) = 10,000 − 8,000 = 2,000 incremental shares.
Question 5: Which of the following items is reported as Other Comprehensive Income (OCI) rather than in net income?
- Unrealized gains on trading securities
- Foreign currency translation adjustments (Correct answer)
- Gains on sale of plant assets
- Interest income on held-to-maturity investments
Correct answer: Foreign currency translation adjustments
Foreign currency translation adjustments are reported in OCI and accumulate in accumulated other comprehensive income (AOCI) on the balance sheet.
Question 6: Under the allowance method for bad debts, when a specific account is written off, which of the following is TRUE?
- Net accounts receivable decreases
- Net accounts receivable is unchanged (Correct answer)
- Bad debt expense is recognized at write-off
- Total assets decrease at write-off
Correct answer: Net accounts receivable is unchanged
Writing off an account reduces both gross receivables and the allowance by equal amounts, leaving net accounts receivable unchanged.
Question 7: A company declares a 3-for-1 stock split. Which of the following best describes the accounting treatment?
- Retained earnings decrease; common stock increases
- Par value per share decreases; total stockholders' equity is unchanged (Correct answer)
- Additional paid-in capital increases; common stock decreases
- Total assets increase by the fair value of new shares issued
Correct answer: Par value per share decreases; total stockholders' equity is unchanged
A stock split reduces par value per share proportionally (e.g., $3 to $1), increases shares outstanding threefold, and leaves total stockholders' equity unchanged.
Certified Management Accountant Financial Reporting 5
A company issues 1,000 shares of $10 par value stock at $25 per share.
What is the credit to additional paid-in capital?