Free CPA FAR (Financial Accounting & Reporting) Practice Questions

B is correct. Under ASC 740-10-25, a deferred tax liability (DTL) arises from taxable temporary differences, which occur when an asset's book carrying amount exceeds its tax basis. When the asset is recovered (through depreciation, sale, or use), the excess book amount over tax basis will result in additional taxable income in future periods. Choice A describes a deductible temporary difference, which gives rise to a deferred tax asset, not a liability. Choice C describes a source of deferred tax assets through NOL carryforwards. Choice D describes a valuation allowance, which is a reduction of deferred tax assets, not a source of deferred tax liabilities.

C is correct. Variable payments based on an index or rate are not one of the five finance lease classification criteria. The five criteria are: (1) transfer of ownership, (2) bargain purchase option, (3) lease term for major part of economic life, (4) PV of payments substantially all of fair value, (5) specialized asset with no alternative use. Variable payments affect measurement but not classification.

B is correct. Under the double-declining-balance method, the rate is 2 / 10 = 20%. Year 1 depreciation = \$500,000 \times 20% = \$100,000. Book value at end of Year 1 = \$500,000 − \$100,000 = \$400,000. Year 2 depreciation = \$400,000 \times 20% = \$80,000.
Choice A is incorrect because \$64,000 would be the Year 3 depreciation (\$320,000 \times 20%).
Choice D is incorrect because \$100,000 is the Year 1 depreciation, not Year 2. Under DDB, each year's depreciation is applied to the declining book value.
Choice C is incorrect because \$90,000 does not correspond to any correct application of the DDB method for this asset.