1
HIGHEST INCOME TAX-INTERMEDIATE
ACCOUNTING FULL PACKAGE STUDY GUIDE 2026-
27 LATEST VERSION
Instructions: Select the single best answer for each question. This examination
covers the fundamental principles, computational applications, and financial
reporting requirements for accounting for income taxes under U.S. GAAP (ASC
740) at the intermediate accounting level.
Section 1: Conceptual Foundations (Questions 1–15)
1. The asset-liability method (also known as the balance sheet approach) for
accounting for income taxes requires that:
A) Deferred tax assets and liabilities be recognized based on the temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements
B) Income tax expense be calculated as the amount of taxes payable for the
current period only
C) Deferred taxes be recognized only for permanent differences
D) The taxes payable method be used exclusively
Explanation: The asset-liability method focuses on the balance sheet by
recognizing deferred tax assets and liabilities for temporary differences—the
differences between the tax basis of assets and liabilities and their financial
reporting carrying amounts. These deferred tax amounts are measured using
enacted tax rates expected to apply when the differences reverse.
2. Which of the following best describes a "temporary difference"?
A) A difference between pretax accounting income and taxable income that will
never reverse
B) A difference between the tax basis of an asset or liability and its reported
carrying amount in the financial statements that will result in taxable or
deductible amounts in future years
,2
C) A difference that arises only from municipal bond interest
D) A difference that is caused solely by changes in tax rates
Explanation: Temporary differences are differences between the carrying
amount of an asset or liability in the financial statements and its tax basis.
These differences will result in future taxable or deductible amounts when the
asset is recovered or the liability is settled.
3. A "taxable temporary difference" will result in:
A) A deferred tax asset
B) A deferred tax liability
C) A permanent difference
D) A valuation allowance
Explanation: A taxable temporary difference is a difference that will result in
future taxable amounts when the carrying amount of an asset exceeds its tax
basis (or when a liability's carrying amount is less than its tax basis). This
creates a deferred tax liability because the company will pay more taxes in the
future.
4. A "deductible temporary difference" will result in:
A) A deferred tax asset
B) A deferred tax liability
C) A permanent difference
D) An increase in current taxes payable
Explanation: A deductible temporary difference is a difference that will result in
future deductible amounts when the asset is recovered or the liability is settled.
This creates a deferred tax asset because the company will pay less taxes in the
future.
5. The primary purpose of interperiod income tax allocation is to:
A) Allow reporting entities to smooth tax payments to taxing agencies
B) Recognize an asset or liability for the future tax consequences of
temporary differences
C) Eliminate all differences between book and tax income
D) Maximize current period net income
,3
Explanation: Interperiod income tax allocation matches income tax expense
with the accounting income that gives rise to it, recognizing deferred tax assets
and liabilities for the future tax consequences of temporary differences.
6. Which of the following is a permanent difference?
A) Depreciation expense calculated differently for book and tax purposes
B) Warranty expense accrued for book purposes but deducted for tax purposes
when paid
C) Interest income on municipal bonds that is exempt from taxation
D) Rent received in advance that is taxable when received but deferred for
book purposes
Explanation: Permanent differences are differences between book and taxable
income that will never reverse. Municipal bond interest is tax-exempt
permanently, so it is included in book income but never in taxable income.
7. Under U.S. GAAP, deferred tax assets and liabilities are measured using:
A) The tax rate in effect at the end of the current year
B) The enacted tax rate expected to apply in the years when the temporary
differences reverse
C) The average tax rate over the next five years
D) The highest marginal tax rate
Explanation: Deferred tax assets and liabilities are measured using the enacted
tax rate expected to apply to taxable income in the periods when the temporary
differences are expected to reverse.
8. A valuation allowance is established for a deferred tax asset when:
A) The deferred tax asset is recognized for the first time
B) It is "more likely than not" that some portion or all of the deferred tax
asset will not be realized
C) The tax rate increases
D) The company has net operating losses
Explanation: A valuation allowance reduces the deferred tax asset to the
amount that is more likely than not to be realized. Evidence, both positive and
negative, is evaluated to determine if a valuation allowance is needed.
, 4
9. The recognition threshold for uncertain tax positions under ASC 740
requires that:
A) The tax position has a 50% or greater chance of being sustained
B) The tax position is "more likely than not" (greater than 50%) to be
sustained upon examination
C) The tax position has a 75% or greater chance of being sustained
D) The tax position is virtually certain to be sustained
Explanation: Under ASC 740, a tax position is recognized as a benefit only if it is
"more likely than not" (i.e., a likelihood of more than 50%) that the tax position
would be sustained upon examination by taxing authorities.
10. A deferred tax asset arises from which of the following?
A) Revenue recognized for tax purposes before it is recognized for book
purposes
B) Expenses recognized for book purposes before they are deductible for tax
purposes
C) Fines and penalties that are not deductible for tax purposes
D) Life insurance proceeds that are not taxable
Explanation: When an expense is recognized for book purposes before it is
deductible for tax purposes (e.g., warranty expense accrual), a deductible
temporary difference arises, creating a deferred tax asset.
11. A deferred tax liability arises from which of the following?
A) Revenue recognized for book purposes before it is taxable for tax purposes
B) Expenses recognized for book purposes before they are deductible for tax
purposes
C) Municipal bond interest
D) Fines and penalties
Explanation: When revenue is recognized for book purposes before it is taxable
for tax purposes (e.g., installment sales), a taxable temporary difference arises,
creating a deferred tax liability.
12. The tax benefit of a net operating loss (NOL) carryforward is recognized
as:
A) A deferred tax asset in the loss year
HIGHEST INCOME TAX-INTERMEDIATE
ACCOUNTING FULL PACKAGE STUDY GUIDE 2026-
27 LATEST VERSION
Instructions: Select the single best answer for each question. This examination
covers the fundamental principles, computational applications, and financial
reporting requirements for accounting for income taxes under U.S. GAAP (ASC
740) at the intermediate accounting level.
Section 1: Conceptual Foundations (Questions 1–15)
1. The asset-liability method (also known as the balance sheet approach) for
accounting for income taxes requires that:
A) Deferred tax assets and liabilities be recognized based on the temporary
differences between the tax basis of assets and liabilities and their reported
amounts in the financial statements
B) Income tax expense be calculated as the amount of taxes payable for the
current period only
C) Deferred taxes be recognized only for permanent differences
D) The taxes payable method be used exclusively
Explanation: The asset-liability method focuses on the balance sheet by
recognizing deferred tax assets and liabilities for temporary differences—the
differences between the tax basis of assets and liabilities and their financial
reporting carrying amounts. These deferred tax amounts are measured using
enacted tax rates expected to apply when the differences reverse.
2. Which of the following best describes a "temporary difference"?
A) A difference between pretax accounting income and taxable income that will
never reverse
B) A difference between the tax basis of an asset or liability and its reported
carrying amount in the financial statements that will result in taxable or
deductible amounts in future years
,2
C) A difference that arises only from municipal bond interest
D) A difference that is caused solely by changes in tax rates
Explanation: Temporary differences are differences between the carrying
amount of an asset or liability in the financial statements and its tax basis.
These differences will result in future taxable or deductible amounts when the
asset is recovered or the liability is settled.
3. A "taxable temporary difference" will result in:
A) A deferred tax asset
B) A deferred tax liability
C) A permanent difference
D) A valuation allowance
Explanation: A taxable temporary difference is a difference that will result in
future taxable amounts when the carrying amount of an asset exceeds its tax
basis (or when a liability's carrying amount is less than its tax basis). This
creates a deferred tax liability because the company will pay more taxes in the
future.
4. A "deductible temporary difference" will result in:
A) A deferred tax asset
B) A deferred tax liability
C) A permanent difference
D) An increase in current taxes payable
Explanation: A deductible temporary difference is a difference that will result in
future deductible amounts when the asset is recovered or the liability is settled.
This creates a deferred tax asset because the company will pay less taxes in the
future.
5. The primary purpose of interperiod income tax allocation is to:
A) Allow reporting entities to smooth tax payments to taxing agencies
B) Recognize an asset or liability for the future tax consequences of
temporary differences
C) Eliminate all differences between book and tax income
D) Maximize current period net income
,3
Explanation: Interperiod income tax allocation matches income tax expense
with the accounting income that gives rise to it, recognizing deferred tax assets
and liabilities for the future tax consequences of temporary differences.
6. Which of the following is a permanent difference?
A) Depreciation expense calculated differently for book and tax purposes
B) Warranty expense accrued for book purposes but deducted for tax purposes
when paid
C) Interest income on municipal bonds that is exempt from taxation
D) Rent received in advance that is taxable when received but deferred for
book purposes
Explanation: Permanent differences are differences between book and taxable
income that will never reverse. Municipal bond interest is tax-exempt
permanently, so it is included in book income but never in taxable income.
7. Under U.S. GAAP, deferred tax assets and liabilities are measured using:
A) The tax rate in effect at the end of the current year
B) The enacted tax rate expected to apply in the years when the temporary
differences reverse
C) The average tax rate over the next five years
D) The highest marginal tax rate
Explanation: Deferred tax assets and liabilities are measured using the enacted
tax rate expected to apply to taxable income in the periods when the temporary
differences are expected to reverse.
8. A valuation allowance is established for a deferred tax asset when:
A) The deferred tax asset is recognized for the first time
B) It is "more likely than not" that some portion or all of the deferred tax
asset will not be realized
C) The tax rate increases
D) The company has net operating losses
Explanation: A valuation allowance reduces the deferred tax asset to the
amount that is more likely than not to be realized. Evidence, both positive and
negative, is evaluated to determine if a valuation allowance is needed.
, 4
9. The recognition threshold for uncertain tax positions under ASC 740
requires that:
A) The tax position has a 50% or greater chance of being sustained
B) The tax position is "more likely than not" (greater than 50%) to be
sustained upon examination
C) The tax position has a 75% or greater chance of being sustained
D) The tax position is virtually certain to be sustained
Explanation: Under ASC 740, a tax position is recognized as a benefit only if it is
"more likely than not" (i.e., a likelihood of more than 50%) that the tax position
would be sustained upon examination by taxing authorities.
10. A deferred tax asset arises from which of the following?
A) Revenue recognized for tax purposes before it is recognized for book
purposes
B) Expenses recognized for book purposes before they are deductible for tax
purposes
C) Fines and penalties that are not deductible for tax purposes
D) Life insurance proceeds that are not taxable
Explanation: When an expense is recognized for book purposes before it is
deductible for tax purposes (e.g., warranty expense accrual), a deductible
temporary difference arises, creating a deferred tax asset.
11. A deferred tax liability arises from which of the following?
A) Revenue recognized for book purposes before it is taxable for tax purposes
B) Expenses recognized for book purposes before they are deductible for tax
purposes
C) Municipal bond interest
D) Fines and penalties
Explanation: When revenue is recognized for book purposes before it is taxable
for tax purposes (e.g., installment sales), a taxable temporary difference arises,
creating a deferred tax liability.
12. The tax benefit of a net operating loss (NOL) carryforward is recognized
as:
A) A deferred tax asset in the loss year
