ACCT 304 EXAM 3 QUESTIONS WITH ANSWERS
AND EXPLANATIONS
| American Public University
1. A contract gives Pioneer Logistics the right to control the use of a specified machine for three years in
exchange for fixed payments. The supplier has no substantive substitution right. Which conclusion is
most appropriate?
A. The contract is a lease only if the purchase option is exercised
B. The contract cannot be a lease because legal title stays with the supplier
C. Only contracts involving real estate can be leases
D. The contract contains a lease because {c} controls the use of an identified asset
Correct Answer: D. The contract contains a lease because {c} controls the use of an identified asset
Explanation: A lease conveys the right to control the use of an identified asset for a period of time in
exchange for consideration. Legal title need not transfer.
2. Triton Equipment incurs a nondeductible regulatory fine that reduces pretax book income but will
never be deductible on a tax return. What type of book-tax difference is created?
A. Taxable temporary difference
B. Deductible temporary difference
C. Permanent difference
D. Net operating loss carryforward
Correct Answer: C. Permanent difference
Explanation: Because the fine affects book income but never taxable income in any period, the difference
does not reverse. It is a permanent difference and does not create deferred tax assets or liabilities.
3. Which feature most clearly characterizes a defined benefit pension plan sponsored by Riverview
Foods?
A. No actuarial assumptions are needed
B. The employer's obligation is limited to a specified contribution each period
C. Employees alone bear all investment risk by definition
D. The employer promises a specified benefit formula, creating actuarial and investment risk for the
employer
Correct Answer: D. The employer promises a specified benefit formula, creating actuarial and investment
risk for the employer
Explanation: A defined benefit plan promises a specified benefit, so the employer bears significant actuarial
and investment risk. A defined contribution plan generally limits the employer obligation to specified
contributions.
, 4. Under U.S. GAAP, how does Vertex Industries generally classify cash interest paid on debt in the
statement of cash flows?
A. Noncash activity
B. Operating activity
C. Financing activity only
D. Investing activity
Correct Answer: B. Operating activity
Explanation: Under U.S. GAAP, cash interest paid is generally classified as an operating cash flow. IFRS
permits different policy choices in some cases, but this exam uses U.S. GAAP.
5. Quartz Manufacturing enters a five-year lease with end-of-year fixed payments of $125,000. The
appropriate annual discount rate is 7%, and there are no other lease payments or incentives. What is the
approximate initial lease liability?
A. $125,000
B. $548,401
C. $512,525
D. $625,000
Correct Answer: C. $512,525
Explanation: The lease liability is the present value of unpaid lease payments at commencement. The PV of
five end-of-year payments of $125,000 discounted at 7% is approximately $512,525.
6. At year-end, the tax basis of a depreciable asset is $720,000 lower than its carrying amount because tax
depreciation has been accelerated. The enacted future tax rate is 25%. What deferred tax balance
generally results from this $720,000 taxable temporary difference?
A. Deferred tax liability of $180,000
B. Current tax payable of $180,000 only
C. No deferred tax effect
D. Deferred tax asset of $180,000
Correct Answer: A. Deferred tax liability of $180,000
Explanation: When an asset's carrying amount exceeds its tax basis, future recovery generally creates
taxable amounts. The DTL is $720,000 x 25% = $180,000.
7. At commencement, Riverview Foods measures a lease liability of $640,000. It has prepaid rent of
$30,000, receives a $15,000 lease incentive, and incurs $12,000 of qualifying initial direct costs. What is
the initial right-of-use asset?
A. $640,000
B. $697,000
C. $667,000
D. $583,000
Correct Answer: C. $667,000
Explanation: Initial ROU asset generally starts with the lease liability, plus qualifying prepayments and
initial direct costs, less incentives received: $640,000 + $30,000 + $12,000 - $15,000 = $667,000.
AND EXPLANATIONS
| American Public University
1. A contract gives Pioneer Logistics the right to control the use of a specified machine for three years in
exchange for fixed payments. The supplier has no substantive substitution right. Which conclusion is
most appropriate?
A. The contract is a lease only if the purchase option is exercised
B. The contract cannot be a lease because legal title stays with the supplier
C. Only contracts involving real estate can be leases
D. The contract contains a lease because {c} controls the use of an identified asset
Correct Answer: D. The contract contains a lease because {c} controls the use of an identified asset
Explanation: A lease conveys the right to control the use of an identified asset for a period of time in
exchange for consideration. Legal title need not transfer.
2. Triton Equipment incurs a nondeductible regulatory fine that reduces pretax book income but will
never be deductible on a tax return. What type of book-tax difference is created?
A. Taxable temporary difference
B. Deductible temporary difference
C. Permanent difference
D. Net operating loss carryforward
Correct Answer: C. Permanent difference
Explanation: Because the fine affects book income but never taxable income in any period, the difference
does not reverse. It is a permanent difference and does not create deferred tax assets or liabilities.
3. Which feature most clearly characterizes a defined benefit pension plan sponsored by Riverview
Foods?
A. No actuarial assumptions are needed
B. The employer's obligation is limited to a specified contribution each period
C. Employees alone bear all investment risk by definition
D. The employer promises a specified benefit formula, creating actuarial and investment risk for the
employer
Correct Answer: D. The employer promises a specified benefit formula, creating actuarial and investment
risk for the employer
Explanation: A defined benefit plan promises a specified benefit, so the employer bears significant actuarial
and investment risk. A defined contribution plan generally limits the employer obligation to specified
contributions.
, 4. Under U.S. GAAP, how does Vertex Industries generally classify cash interest paid on debt in the
statement of cash flows?
A. Noncash activity
B. Operating activity
C. Financing activity only
D. Investing activity
Correct Answer: B. Operating activity
Explanation: Under U.S. GAAP, cash interest paid is generally classified as an operating cash flow. IFRS
permits different policy choices in some cases, but this exam uses U.S. GAAP.
5. Quartz Manufacturing enters a five-year lease with end-of-year fixed payments of $125,000. The
appropriate annual discount rate is 7%, and there are no other lease payments or incentives. What is the
approximate initial lease liability?
A. $125,000
B. $548,401
C. $512,525
D. $625,000
Correct Answer: C. $512,525
Explanation: The lease liability is the present value of unpaid lease payments at commencement. The PV of
five end-of-year payments of $125,000 discounted at 7% is approximately $512,525.
6. At year-end, the tax basis of a depreciable asset is $720,000 lower than its carrying amount because tax
depreciation has been accelerated. The enacted future tax rate is 25%. What deferred tax balance
generally results from this $720,000 taxable temporary difference?
A. Deferred tax liability of $180,000
B. Current tax payable of $180,000 only
C. No deferred tax effect
D. Deferred tax asset of $180,000
Correct Answer: A. Deferred tax liability of $180,000
Explanation: When an asset's carrying amount exceeds its tax basis, future recovery generally creates
taxable amounts. The DTL is $720,000 x 25% = $180,000.
7. At commencement, Riverview Foods measures a lease liability of $640,000. It has prepaid rent of
$30,000, receives a $15,000 lease incentive, and incurs $12,000 of qualifying initial direct costs. What is
the initial right-of-use asset?
A. $640,000
B. $697,000
C. $667,000
D. $583,000
Correct Answer: C. $667,000
Explanation: Initial ROU asset generally starts with the lease liability, plus qualifying prepayments and
initial direct costs, less incentives received: $640,000 + $30,000 + $12,000 - $15,000 = $667,000.
