Intermediate Accounting III (Units 5–9) Practice Quiz 2026 UPDATE
1. Which of the following is considered a temporary difference that results in a deferred tax
liability?
A. Interest received on municipal bonds
B. Fines and penalties resulting from a violation of law
C. Accelerated depreciation for tax purposes and straight-line for financial reporting
D. Proceeds from life insurance on key officers
Answer: C
Rationale: Accelerated tax depreciation creates a lower taxable income now and higher in
the future compared to financial reporting, resulting in a deferred tax liability.
2. In accounting for income taxes, what is the purpose of a valuation allowance?
A. To increase the deferred tax liability for expected tax rate hikes
B. To offset the effects of permanent differences
C. To reduce a deferred tax asset to the amount that is ‘more likely than not’ to be realized
D. To account for uncertain tax positions under GAAP
Answer: C
,Rationale: A valuation allowance is a contra-asset account used when it is more likely than
not (greater than 50% probability) that some or all of the deferred tax assets will not be
realized.
3. Which component of pension expense represents the increase in the PBO due to the
passage of time?
A. Service Cost
B. Interest Cost
C. Actual Return on Plan Assets
D. Amortization of Prior Service Cost
Answer: B
Rationale: Interest cost is the increase in the Projected Benefit Obligation (PBO) resulting
from the passage of time, calculated using the settlement rate.
4. How is the ‘Service Cost’ component of pension expense reported on the income
statement under current GAAP?
A. Part of Other Comprehensive Income
B. In the same line item as other employee compensation costs
C. Separately from other pension components in the non-operating section
D. As an extraordinary item
Answer: B
, Rationale: Service cost is reported in the same line item as other employee compensation
costs (typically operating expenses), while other pension components are reported outside
of income from operations.
5. Under the criteria for a finance lease (lessee), which of the following is NOT a criterion?
A. The lease term is for 50% or more of the remaining economic life of the asset
B. The lease contains a purchase option that the lessee is reasonably certain to exercise
C. Ownership transfers to the lessee at the end of the term
D. The asset is of such a specialized nature that it has no alternative use to the lessor
Answer: A
Rationale: The criterion is generally 75% or more of the economic life. 50% is not one of
the ‘bright-line’ tests (though GAAP focuses more on the ‘major part’ of the life).
6. For a lessee, what initial value is recorded for the Right-of-Use (ROU) asset in an operating
lease?
A. The fair market value of the asset
B. The present value of lease payments plus initial direct costs
C. The undiscounted sum of all lease payments
D. The liquidation value of the asset
Answer: B
1. Which of the following is considered a temporary difference that results in a deferred tax
liability?
A. Interest received on municipal bonds
B. Fines and penalties resulting from a violation of law
C. Accelerated depreciation for tax purposes and straight-line for financial reporting
D. Proceeds from life insurance on key officers
Answer: C
Rationale: Accelerated tax depreciation creates a lower taxable income now and higher in
the future compared to financial reporting, resulting in a deferred tax liability.
2. In accounting for income taxes, what is the purpose of a valuation allowance?
A. To increase the deferred tax liability for expected tax rate hikes
B. To offset the effects of permanent differences
C. To reduce a deferred tax asset to the amount that is ‘more likely than not’ to be realized
D. To account for uncertain tax positions under GAAP
Answer: C
,Rationale: A valuation allowance is a contra-asset account used when it is more likely than
not (greater than 50% probability) that some or all of the deferred tax assets will not be
realized.
3. Which component of pension expense represents the increase in the PBO due to the
passage of time?
A. Service Cost
B. Interest Cost
C. Actual Return on Plan Assets
D. Amortization of Prior Service Cost
Answer: B
Rationale: Interest cost is the increase in the Projected Benefit Obligation (PBO) resulting
from the passage of time, calculated using the settlement rate.
4. How is the ‘Service Cost’ component of pension expense reported on the income
statement under current GAAP?
A. Part of Other Comprehensive Income
B. In the same line item as other employee compensation costs
C. Separately from other pension components in the non-operating section
D. As an extraordinary item
Answer: B
, Rationale: Service cost is reported in the same line item as other employee compensation
costs (typically operating expenses), while other pension components are reported outside
of income from operations.
5. Under the criteria for a finance lease (lessee), which of the following is NOT a criterion?
A. The lease term is for 50% or more of the remaining economic life of the asset
B. The lease contains a purchase option that the lessee is reasonably certain to exercise
C. Ownership transfers to the lessee at the end of the term
D. The asset is of such a specialized nature that it has no alternative use to the lessor
Answer: A
Rationale: The criterion is generally 75% or more of the economic life. 50% is not one of
the ‘bright-line’ tests (though GAAP focuses more on the ‘major part’ of the life).
6. For a lessee, what initial value is recorded for the Right-of-Use (ROU) asset in an operating
lease?
A. The fair market value of the asset
B. The present value of lease payments plus initial direct costs
C. The undiscounted sum of all lease payments
D. The liquidation value of the asset
Answer: B
