Intermediate Accounting III (Units 5–9) Exam 2026 UPDATE
1. Which of the following situations will result in a deferred tax liability?
A. Revenues are recognized in the tax return before they are recognized in the financial
statements.
B. Revenues are recognized in the financial statements before they are recognized in the
tax return.
C. Expenses are recognized in the financial statements before they are recognized in the tax
return.
D. Warranty costs are accrued for financial reporting but not yet deductible for tax.
Answer: B
Rationale: A deferred tax liability arises when financial income is higher than taxable
income due to temporary differences that will result in taxable amounts in future years,
such as recognizing revenue in financial statements before the tax return.
2. Under the current lease accounting standards (ASC 842), how should a lessee classify a
lease if the present value of the lease payments equals 95% of the fair value of the leased
asset?
A. Finance Lease
B. Operating Lease
,C. Short-term Lease
D. Direct Financing Lease
Answer: A
Rationale: If the present value of lease payments amounts to substantially all (typically
90% or more) of the fair value of the asset, the lease is classified as a finance lease by the
lessee.
3. What component of pension expense is calculated by multiplying the settlement rate by
the beginning balance of the projected benefit obligation (PBO)?
A. Service Cost
B. Actual Return on Plan Assets
C. Interest Cost
D. Amortization of Prior Service Cost
Answer: C
Rationale: Interest cost is the increase in the PBO due to the passage of time and is
calculated as the PBO at the start of the year multiplied by the discount (settlement) rate.
4. In a statement of cash flows (indirect method), how is an increase in accounts receivable
handled?
A. Added to net income in the operating section.
B. Reported as a cash outflow in the investing section.
, C. Deducted from net income in the operating section.
D. Reported as a cash inflow in the financing section.
Answer: C
Rationale: An increase in accounts receivable implies that revenue was recognized but
cash was not yet collected. Therefore, it is deducted from net income to arrive at cash flows
from operating activities.
5. Which of the following is considered a permanent difference for income tax purposes?
A. Depreciation expense differences due to MACRS.
B. Installment sales recognized for financial reporting but deferred for tax.
C. Proceeds from life insurance on an officer where the company is the beneficiary.
D. Bad debt expense recognized using the allowance method.
Answer: C
Rationale: Life insurance proceeds are generally not taxable; because they never enter into
the calculation of taxable income but are included in financial income, they represent a
permanent difference.
6. A company changes its depreciation method from double-declining balance to straight-line.
How is this change accounted for?
A. Retrospectively, by adjusting the beginning balance of retained earnings.
B. As an extraordinary item in the current year income statement.
1. Which of the following situations will result in a deferred tax liability?
A. Revenues are recognized in the tax return before they are recognized in the financial
statements.
B. Revenues are recognized in the financial statements before they are recognized in the
tax return.
C. Expenses are recognized in the financial statements before they are recognized in the tax
return.
D. Warranty costs are accrued for financial reporting but not yet deductible for tax.
Answer: B
Rationale: A deferred tax liability arises when financial income is higher than taxable
income due to temporary differences that will result in taxable amounts in future years,
such as recognizing revenue in financial statements before the tax return.
2. Under the current lease accounting standards (ASC 842), how should a lessee classify a
lease if the present value of the lease payments equals 95% of the fair value of the leased
asset?
A. Finance Lease
B. Operating Lease
,C. Short-term Lease
D. Direct Financing Lease
Answer: A
Rationale: If the present value of lease payments amounts to substantially all (typically
90% or more) of the fair value of the asset, the lease is classified as a finance lease by the
lessee.
3. What component of pension expense is calculated by multiplying the settlement rate by
the beginning balance of the projected benefit obligation (PBO)?
A. Service Cost
B. Actual Return on Plan Assets
C. Interest Cost
D. Amortization of Prior Service Cost
Answer: C
Rationale: Interest cost is the increase in the PBO due to the passage of time and is
calculated as the PBO at the start of the year multiplied by the discount (settlement) rate.
4. In a statement of cash flows (indirect method), how is an increase in accounts receivable
handled?
A. Added to net income in the operating section.
B. Reported as a cash outflow in the investing section.
, C. Deducted from net income in the operating section.
D. Reported as a cash inflow in the financing section.
Answer: C
Rationale: An increase in accounts receivable implies that revenue was recognized but
cash was not yet collected. Therefore, it is deducted from net income to arrive at cash flows
from operating activities.
5. Which of the following is considered a permanent difference for income tax purposes?
A. Depreciation expense differences due to MACRS.
B. Installment sales recognized for financial reporting but deferred for tax.
C. Proceeds from life insurance on an officer where the company is the beneficiary.
D. Bad debt expense recognized using the allowance method.
Answer: C
Rationale: Life insurance proceeds are generally not taxable; because they never enter into
the calculation of taxable income but are included in financial income, they represent a
permanent difference.
6. A company changes its depreciation method from double-declining balance to straight-line.
How is this change accounted for?
A. Retrospectively, by adjusting the beginning balance of retained earnings.
B. As an extraordinary item in the current year income statement.
