CPA FAR Practice Test

CPA FAR Income Taxes, Fair Value & Leases Practice Questions

Income Taxes, Fair Value & Leases makes up 6 of every 50 questions on a Tigertest CPA FAR practice test. Here are 10 of the 24 questions on it, each with the answer and the reason.

Updated 2026-11-10 by the Tigertest team. Based on the AICPA's 2026 FAR blueprint. Original multiple-choice questions; simulations not included. Not affiliated with the AICPA or NASBA.

1. 1. Equipment has a book basis of $300,000 and a tax basis of $220,000. The enacted tax rate is 25% for all years. The deferred tax liability is:

   • A.$75,000
   • B.$20,000
   • C.$80,000
   • D.$16,800

   Answer: B. The taxable temporary difference is $80,000, and $80,000 x 25% = $20,000. Using a 21% rate gives $16,800, but the enacted rate given applies.

2. 2. A company's allowance for credit losses is $40,000, deductible for tax only when accounts are written off. The enacted tax rate is 25%. The related deferred tax asset is:

   • A.$8,400
   • B.$30,000
   • C.$40,000
   • D.$10,000

   Answer: D. The allowance is a deductible temporary difference: $40,000 x 25% = $10,000 deferred tax asset.

3. 3. A valuation allowance against a deferred tax asset is required when it is:

   • A.More likely than not to go unused
   • B.Remote that it will be used
   • C.Probable it will go unused
   • D.Reasonably possible to go unused

   Answer: A. ASC 740 reduces a deferred tax asset by a valuation allowance if, on the weight of evidence, it is more likely than not (over 50%) that some or all of it will not be realized.

4. 4. Deferred tax assets and liabilities are measured using:

   • A.An average of past tax rates
   • B.Rates proposed but not passed
   • C.Enacted rates for the reversal year
   • D.The current year's tax rate

   Answer: C. Deferred taxes use the enacted rate expected to apply when the difference reverses. Proposed rate changes are ignored until enacted.

5. 5. Pretax book income is $500,000, including $20,000 of municipal bond interest. Tax depreciation exceeds book depreciation by $60,000. The tax rate is 25%. Total income tax expense is:

   • A.$105,000
   • B.$135,000
   • C.$120,000
   • D.$125,000

   Answer: C. Current tax is ($500,000 - $20,000 - $60,000) x 25% = $105,000 and the deferred liability rises $60,000 x 25% = $15,000, for a total of $120,000. The tax-exempt interest never creates tax.

6. 6. Pretax book income is $800,000, including $10,000 of nondeductible fines and $30,000 of warranty expense accrued but not yet deductible. The tax rate is 25%. Current income taxes payable are:

   • A.$210,000
   • B.$202,500
   • C.$192,500
   • D.$200,000

   Answer: A. Taxable income is $800,000 + $10,000 + $30,000 = $840,000, and $840,000 x 25% = $210,000. Both items are added back for tax.

7. 7. Which item creates a permanent difference between book and taxable income?

   • A.Rent collected in advance
   • B.Accrued warranty costs
   • C.Accelerated tax depreciation
   • D.Interest on municipal bonds

   Answer: D. Municipal bond interest is never taxed, so it never reverses and creates no deferred tax. The other items are temporary differences.

8. 8. A tax position meets the more-likely-than-not threshold. The benefit recognized is:

   • A.The smallest possible outcome
   • B.The largest amount over 50% likely
   • C.The probability-weighted average
   • D.The full amount claimed

   Answer: B. Under ASC 740, a position that meets the threshold is measured as the largest amount of benefit that is more than 50% likely to be realized on settlement.

9. 9. On a classified balance sheet, deferred tax assets and liabilities are reported as:

   • A.Split by related asset
   • B.Noncurrent
   • C.Current
   • D.Split by reversal date

   Answer: B. ASU 2015-17 requires all deferred tax assets and liabilities to be classified as noncurrent.

10. 10. When deferred tax liabilities rise during the year and nothing else changes in deferred taxes, income tax expense is:

    • A.Equal to taxes payable
    • B.Unaffected by deferrals
    • C.Less than taxes payable
    • D.Greater than taxes payable

    Answer: D. Total tax expense is current tax plus the deferred tax change. An increase in deferred tax liabilities adds deferred expense, so total expense exceeds the current payable.