D105 OA2 Intermediate Accounting III (Units 5–9) Practice Quiz 2026 UPDATE
1. Which of the following is NOT one of the components of pension expense for a defined
benefit plan?
A. Service cost
B. Interest cost
C. Amortization of prior service cost
D. Actual return on plan assets
Answer: D
Rationale: Expected return, not actual return, is typically used to determine pension
expense to reduce volatility. Differences between actual and expected are recognized in
OCI.
2. A lessee should classify a lease as a finance lease if which of the following criteria is met?
A. The lease term is 50% of the asset’s economic life.
B. The present value of lease payments equals or exceeds 90% of the asset’s fair value.
C. The lease does not contain a purchase option.
D. Ownership remains with the lessor at the end of the term.
Answer: B
,Rationale: Under ASC 842, one of the five criteria for a finance lease is that the present
value of the sum of lease payments and any residual value guaranteed by the lessee equals
or exceeds substantially all (usually 90%) of the fair value.
3. Which situation creates a deferred tax liability?
A. Accrued warranty expenses that are deductible for tax purposes when paid.
B. Accelerated depreciation for tax purposes and straight-line depreciation for financial
reporting.
C. Subscriptions received in advance that are taxable when received.
D. Loss carryforwards.
Answer: B
Rationale: Accelerated depreciation for tax leads to lower taxable income now and higher
taxable income in the future relative to book income, creating a deferred tax liability.
4. Under the indirect method of preparing the statement of cash flows, how is an increase in
accounts receivable handled?
A. Added to net income
B. Reported in the investing section
C. Subtracted from net income
D. Reported in the financing section
Answer: C
, Rationale: An increase in accounts receivable implies that revenues recognized on an
accrual basis have not yet been collected in cash; thus, it is subtracted from net income to
reach cash flow from operations.
5. When calculating Diluted Earnings Per Share (EPS), the ‘if-converted’ method is used for
which of the following?
A. Stock options
B. Stock warrants
C. Treasury stock
D. Convertible bonds
Answer: D
Rationale: The if-converted method assumes convertible securities (like bonds or
preferred stock) were converted at the beginning of the period.
6. Prior service cost is recognized in which account at the time of a plan amendment?
A. Other Comprehensive Income (OCI)
B. Retained Earnings
C. Pension Expense
D. Net Income
Answer: A
1. Which of the following is NOT one of the components of pension expense for a defined
benefit plan?
A. Service cost
B. Interest cost
C. Amortization of prior service cost
D. Actual return on plan assets
Answer: D
Rationale: Expected return, not actual return, is typically used to determine pension
expense to reduce volatility. Differences between actual and expected are recognized in
OCI.
2. A lessee should classify a lease as a finance lease if which of the following criteria is met?
A. The lease term is 50% of the asset’s economic life.
B. The present value of lease payments equals or exceeds 90% of the asset’s fair value.
C. The lease does not contain a purchase option.
D. Ownership remains with the lessor at the end of the term.
Answer: B
,Rationale: Under ASC 842, one of the five criteria for a finance lease is that the present
value of the sum of lease payments and any residual value guaranteed by the lessee equals
or exceeds substantially all (usually 90%) of the fair value.
3. Which situation creates a deferred tax liability?
A. Accrued warranty expenses that are deductible for tax purposes when paid.
B. Accelerated depreciation for tax purposes and straight-line depreciation for financial
reporting.
C. Subscriptions received in advance that are taxable when received.
D. Loss carryforwards.
Answer: B
Rationale: Accelerated depreciation for tax leads to lower taxable income now and higher
taxable income in the future relative to book income, creating a deferred tax liability.
4. Under the indirect method of preparing the statement of cash flows, how is an increase in
accounts receivable handled?
A. Added to net income
B. Reported in the investing section
C. Subtracted from net income
D. Reported in the financing section
Answer: C
, Rationale: An increase in accounts receivable implies that revenues recognized on an
accrual basis have not yet been collected in cash; thus, it is subtracted from net income to
reach cash flow from operations.
5. When calculating Diluted Earnings Per Share (EPS), the ‘if-converted’ method is used for
which of the following?
A. Stock options
B. Stock warrants
C. Treasury stock
D. Convertible bonds
Answer: D
Rationale: The if-converted method assumes convertible securities (like bonds or
preferred stock) were converted at the beginning of the period.
6. Prior service cost is recognized in which account at the time of a plan amendment?
A. Other Comprehensive Income (OCI)
B. Retained Earnings
C. Pension Expense
D. Net Income
Answer: A
