WGU D105 OA2 COMPREHENSIVE QUIZ
(UNITS 5-9) QUESTIONS AND ANSWERS
1. When a company recognizes a deferred tax asset, but it is more likely than not that some
portion will not be realized, what is the appropriate accounting treatment?
A. The asset is written off directly to Income Tax Expense.
B. The company must change its tax method for financial reporting.
C. The asset is reclassified as a deferred tax liability.
D. A valuation allowance is established as a contra-asset account.
Answer: D
Conceptual Explanation: Under GAAP, if it is more likely than not (greater than 50%) that
some or all of a deferred tax asset will not be realized, a valuation allowance must be
recognized to reduce the carrying value of the asset.
2. Which of the following creates a temporary difference that results in a deferred tax
liability?
A. Fines and penalties resulting from a violation of law.
B. Interest received on municipal bonds.
,C. Accelerated depreciation for tax purposes and straight-line depreciation for financial
reporting.
D. Warranty expenses recognized for financial reporting but not yet deductible for tax.
Answer: C
Conceptual Explanation: Accelerated depreciation for tax creates a lower taxable income
in early years compared to book income, resulting in a future taxable amount, which is a
deferred tax liability.
3. Under ASC 740, how should a change in tax rates be accounted for in relation to existing
deferred tax assets and liabilities?
A. Recognize the effect in the period the change is enacted as a component of income tax
expense.
B. Adjust the items prospectively over the remaining life of the underlying assets.
C. Record the change directly to Retained Earnings as a prior period adjustment.
D. Ignore the change until the temporary differences actually reverse.
Answer: A
Conceptual Explanation: A change in tax laws or rates is recognized in income from
continuing operations in the period of enactment, adjusting the existing deferred tax
accounts.
, 4. A company has a Net Operating Loss (NOL) in 2023. Under current US tax law (TCJA rules),
how is this loss generally handled?
A. Carried forward indefinitely, but limited to 80% of taxable income.
B. Carried back 2 years and forward 20 years.
C. Must be used entirely in the year the loss occurred.
D. Carried back 5 years and forward indefinitely.
Answer: A
Conceptual Explanation: Under the Tax Cuts and Jobs Act (TCJA), most NOLs arising after
2017 cannot be carried back but can be carried forward indefinitely, subject to an 80%
taxable income limitation.
5. Which component of pension expense is recognized as a result of the passage of time on
the projected benefit obligation (PBO)?
A. Service Cost
B. Prior Service Cost Amortization
C. Interest Cost
D. Actual Return on Plan Assets
Answer: C
Conceptual Explanation: Interest cost is the increase in the PBO due to the passage of
time, calculated using the settlement (discount) rate.
(UNITS 5-9) QUESTIONS AND ANSWERS
1. When a company recognizes a deferred tax asset, but it is more likely than not that some
portion will not be realized, what is the appropriate accounting treatment?
A. The asset is written off directly to Income Tax Expense.
B. The company must change its tax method for financial reporting.
C. The asset is reclassified as a deferred tax liability.
D. A valuation allowance is established as a contra-asset account.
Answer: D
Conceptual Explanation: Under GAAP, if it is more likely than not (greater than 50%) that
some or all of a deferred tax asset will not be realized, a valuation allowance must be
recognized to reduce the carrying value of the asset.
2. Which of the following creates a temporary difference that results in a deferred tax
liability?
A. Fines and penalties resulting from a violation of law.
B. Interest received on municipal bonds.
,C. Accelerated depreciation for tax purposes and straight-line depreciation for financial
reporting.
D. Warranty expenses recognized for financial reporting but not yet deductible for tax.
Answer: C
Conceptual Explanation: Accelerated depreciation for tax creates a lower taxable income
in early years compared to book income, resulting in a future taxable amount, which is a
deferred tax liability.
3. Under ASC 740, how should a change in tax rates be accounted for in relation to existing
deferred tax assets and liabilities?
A. Recognize the effect in the period the change is enacted as a component of income tax
expense.
B. Adjust the items prospectively over the remaining life of the underlying assets.
C. Record the change directly to Retained Earnings as a prior period adjustment.
D. Ignore the change until the temporary differences actually reverse.
Answer: A
Conceptual Explanation: A change in tax laws or rates is recognized in income from
continuing operations in the period of enactment, adjusting the existing deferred tax
accounts.
, 4. A company has a Net Operating Loss (NOL) in 2023. Under current US tax law (TCJA rules),
how is this loss generally handled?
A. Carried forward indefinitely, but limited to 80% of taxable income.
B. Carried back 2 years and forward 20 years.
C. Must be used entirely in the year the loss occurred.
D. Carried back 5 years and forward indefinitely.
Answer: A
Conceptual Explanation: Under the Tax Cuts and Jobs Act (TCJA), most NOLs arising after
2017 cannot be carried back but can be carried forward indefinitely, subject to an 80%
taxable income limitation.
5. Which component of pension expense is recognized as a result of the passage of time on
the projected benefit obligation (PBO)?
A. Service Cost
B. Prior Service Cost Amortization
C. Interest Cost
D. Actual Return on Plan Assets
Answer: C
Conceptual Explanation: Interest cost is the increase in the PBO due to the passage of
time, calculated using the settlement (discount) rate.
