Free CPA FAR (Financial Accounting & Reporting) Select Transactions 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.

C is correct. Under ASC 250-10, material prior-period errors are corrected retrospectively by restating all comparative periods presented. Year 1 revenue overstated by 100,000: debit Revenues 100,000; credit Income Tax Expense (benefit) 25,000; credit Retained Earnings 75,000. When Year 2 comparatives are also presented, the Year 2 beginning retained earnings must be reduced to reflect the Year 1 correction. Users of Year 3 financial statements see corrected Year 1 and Year 2 comparatives. Beginning Year 3 retained earnings is also reduced by 75,000 if Year 1 is not a presented comparative period. Choice B describes the old APB Opinion 20 cumulative effect approach (prior to ASC 250) and incorrectly references extraordinary items. Choice A omits the required tax adjustment — errors require full tax gross-up. Choice D uses prospective treatment, which applies to estimate changes, not error corrections.