CPA FAR F4.M4 — Practice Questions
State & Local Government Accounting. Below are 8 real practice questions with worked explanations — a free sample of the F4.M4 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
At year-end a company has a deferred tax asset of $80,000. Management concludes it is more likely than not that $30,000 of that asset will not be realized. How should this be reported under US GAAP?
- Disclose the $30,000 in the notes without adjusting the balance sheet
- Write the deferred tax asset down directly to $50,000 with no allowance
- ✓ Record a $30,000 valuation allowance reducing the net deferred tax asset
- Wait to adjust until the temporary differences actually reverse
Why: When it is more likely than not (greater than 50% probability) that some or all of a deferred tax asset will not be realized, a valuation allowance is recorded to reduce the asset to its realizable amount and tax expense increases by $30,000.
Q2 · medium
A $100,000 taxable temporary difference will reverse next year. The current tax rate is 21%, and a 25% rate has been enacted for next year. At what amount is the related deferred tax liability measured?
- $21,000
- $23,000
- $46,000
- ✓ $25,000
Why: Deferred tax liabilities and assets are measured using the enacted tax rate expected to apply when the temporary difference reverses, not the current-period rate. The DTL is $100,000 x 25% = $25,000.
Q3 · easy
A company's book income includes $10,000 of interest earned on tax-exempt municipal bonds. What deferred tax effect does this item create?
- ✓ None, because a permanent difference creates no deferred tax asset or liability
- A deferred tax liability
- A deferred tax asset
- Both a deferred tax asset and an offsetting deferred tax liability of the same amount
Why: Tax-exempt municipal interest is income for books but never taxable - a permanent difference. Permanent differences never reverse, so they create no deferred tax asset or liability; they only affect the effective tax rate.
Q4 · medium
In the current year, tax depreciation exceeds book depreciation on the same asset. What does this originating temporary difference create?
- A deferred tax asset
- ✓ A deferred tax liability
- A permanent difference
- A prior-period adjustment
Why: Deducting more depreciation for tax than for books lowers taxable income now but produces higher taxable income in later years when book depreciation exceeds tax depreciation. That future taxable amount is a deferred tax liability.
Q5 · medium
A company accrues $40,000 of warranty expense for financial reporting but deducts warranty costs for tax purposes only when paid. With a 25% enacted tax rate, what does this create?
- A $10,000 deferred tax liability
- A $40,000 deferred tax asset
- ✓ A $10,000 deferred tax asset
- No deferred tax effect
Why: The warranty expense is recognized for books now but deducted for tax later, a future deductible amount. That produces a deferred tax asset of $40,000 x 25% = $10,000.
Q6 · medium
A company's current income tax payable for the year is $90,000, and its deferred tax liability increased by $12,000 during the year. What is total income tax expense?
- $90,000
- $78,000
- $12,000
- ✓ $102,000
Why: Total income tax expense equals current tax expense plus the change in deferred taxes. An increase in the deferred tax liability adds deferred tax expense, so total expense is $90,000 + $12,000 = $102,000.
Q7 · hard
Under ASC 740, a company may recognize the benefit of an uncertain tax position only if it is more likely than not to be sustained on examination. Once the recognition threshold is met, at what amount is the benefit measured?
- ✓ The largest amount of benefit more than 50% likely to be realized
- The full amount claimed on the tax return
- Zero until the position is finally settled
- The smallest amount that could possibly be realized
Why: Uncertain tax positions use a two-step model: recognize the benefit only if it is more likely than not to be sustained, then measure it at the largest amount of benefit that is greater than 50% likely to be realized on settlement.
Q8 · medium
Stent Company has a taxable temporary difference of $100,000 at December 31, Year 1 that is expected to reverse in future years. The enacted tax rate is 30% for Year 1 and 21% for all future years. What amount should Stent report as a deferred tax liability at December 31, Year 1?
- $30,000
- $25,500
- $0
- ✓ $21,000
Why: Deferred tax balances are measured at the enacted tax rate expected to apply when the difference reverses — 21% — so the DTL = 100,000 × 21% = $21,000. $30,000 uses the current-period rate. $25,500 averages the two rates. $0 wrongly treats the item as a permanent difference.