D105 OA2 Intermediate Accounting III Comprehensive Quiz 2026 UPDATE
1. Which of the following components increases pension expense?
A. Expected return on plan assets
B. Amortization of a net gain
C. Service cost
D. Benefits paid to retirees
Answer: C
Rationale: Service cost and interest cost generally increase pension expense, while
expected return on plan assets decreases it.
2. Under ASC 842, which criterion would require a lessee to classify a lease as a finance lease?
A. The lease term is 50% of the asset’s economic life.
B. The asset is of a common nature and can be used by others without modification.
C. The present value of lease payments is 75% of the fair value of the asset.
D. The lease contains a purchase option that the lessee is reasonably certain to exercise.
Answer: D
Rationale: A lease is classified as a finance lease if it meets any of the five criteria,
including a purchase option that is reasonably certain to be exercised.
,3. Which of the following creates a deferred tax liability?
A. A taxable temporary difference where financial income exceeds taxable income
currently.
B. An expense that is deductible for tax purposes after it is recognized in financial income.
C. Revenue collected in advance that is taxable when received but recognized later for
financial reporting.
D. A permanent difference such as tax-exempt interest income.
Answer: A
Rationale: Deferred tax liabilities arise from taxable temporary differences where future
taxable amounts will be higher than future financial reporting amounts.
4. In a statement of cash flows (indirect method), how is a gain on the sale of equipment
handled?
A. Added to net income in the operating section.
B. Subtracted from net income in the operating section.
C. Reported as a cash inflow in the financing section.
D. Ignored because it is a non-cash item.
Answer: B
, Rationale: Since the full cash proceeds are reported in the investing section, the gain
included in net income must be subtracted to avoid double counting and to reconcile to
operating cash flow.
5. When calculating Diluted EPS, what happens to convertible bonds under the if-converted
method?
A. The denominator is decreased by the number of potential shares.
B. The numerator is increased by the after-tax interest expense saved.
C. The numerator is decreased by the preferred dividends paid.
D. The bonds are only included if they are anti-dilutive.
Answer: B
Rationale: The if-converted method assumes conversion at the beginning of the period;
thus, interest expense (net of tax) is added back to the numerator because it would not
have been paid.
6. The Projected Benefit Obligation (PBO) is best described as:
A. The present value of vested benefits only at current salary levels.
B. The present value of all benefits earned to date using expected future salary levels.
C. The fair value of the assets set aside to pay for future pension benefits.
D. The amount of cash the company must pay to retirees in the current year.
Answer: B
1. Which of the following components increases pension expense?
A. Expected return on plan assets
B. Amortization of a net gain
C. Service cost
D. Benefits paid to retirees
Answer: C
Rationale: Service cost and interest cost generally increase pension expense, while
expected return on plan assets decreases it.
2. Under ASC 842, which criterion would require a lessee to classify a lease as a finance lease?
A. The lease term is 50% of the asset’s economic life.
B. The asset is of a common nature and can be used by others without modification.
C. The present value of lease payments is 75% of the fair value of the asset.
D. The lease contains a purchase option that the lessee is reasonably certain to exercise.
Answer: D
Rationale: A lease is classified as a finance lease if it meets any of the five criteria,
including a purchase option that is reasonably certain to be exercised.
,3. Which of the following creates a deferred tax liability?
A. A taxable temporary difference where financial income exceeds taxable income
currently.
B. An expense that is deductible for tax purposes after it is recognized in financial income.
C. Revenue collected in advance that is taxable when received but recognized later for
financial reporting.
D. A permanent difference such as tax-exempt interest income.
Answer: A
Rationale: Deferred tax liabilities arise from taxable temporary differences where future
taxable amounts will be higher than future financial reporting amounts.
4. In a statement of cash flows (indirect method), how is a gain on the sale of equipment
handled?
A. Added to net income in the operating section.
B. Subtracted from net income in the operating section.
C. Reported as a cash inflow in the financing section.
D. Ignored because it is a non-cash item.
Answer: B
, Rationale: Since the full cash proceeds are reported in the investing section, the gain
included in net income must be subtracted to avoid double counting and to reconcile to
operating cash flow.
5. When calculating Diluted EPS, what happens to convertible bonds under the if-converted
method?
A. The denominator is decreased by the number of potential shares.
B. The numerator is increased by the after-tax interest expense saved.
C. The numerator is decreased by the preferred dividends paid.
D. The bonds are only included if they are anti-dilutive.
Answer: B
Rationale: The if-converted method assumes conversion at the beginning of the period;
thus, interest expense (net of tax) is added back to the numerator because it would not
have been paid.
6. The Projected Benefit Obligation (PBO) is best described as:
A. The present value of vested benefits only at current salary levels.
B. The present value of all benefits earned to date using expected future salary levels.
C. The fair value of the assets set aside to pay for future pension benefits.
D. The amount of cash the company must pay to retirees in the current year.
Answer: B
