Sample Questions
Question 1
Easy
When must a company test goodwill for impairment?
Solution
C is correct.
Under ASC 350, goodwill is tested for impairment at least annually at the reporting unit level. In addition, interim impairment testing is required whenever events or changes in circumstances (triggering events) indicate that the fair value of a reporting unit may have fallen below its carrying amount. Examples of triggering events include significant adverse changes in business climate, loss of key personnel, or a sustained decline in stock price.
Under ASC 350, goodwill is tested for impairment at least annually at the reporting unit level. In addition, interim impairment testing is required whenever events or changes in circumstances (triggering events) indicate that the fair value of a reporting unit may have fallen below its carrying amount. Examples of triggering events include significant adverse changes in business climate, loss of key personnel, or a sustained decline in stock price.
Question 2
Medium
What distinguishes a cash flow hedge from a fair value hedge?
Solution
B is correct.
Under ASC 815, a cash flow hedge designates a derivative to hedge exposure to variability in cash flows (e.g., floating rate debt, forecasted commodity purchases). Effective portions of gains/losses on the hedging instrument are deferred in OCI and reclassified to earnings when the hedged transaction affects earnings. A fair value hedge designates a derivative to hedge changes in fair value of a recognized asset or liability (e.g., fixed-rate debt). Both the derivative and the hedged item are marked to fair value through earnings.
Under ASC 815, a cash flow hedge designates a derivative to hedge exposure to variability in cash flows (e.g., floating rate debt, forecasted commodity purchases). Effective portions of gains/losses on the hedging instrument are deferred in OCI and reclassified to earnings when the hedged transaction affects earnings. A fair value hedge designates a derivative to hedge changes in fair value of a recognized asset or liability (e.g., fixed-rate debt). Both the derivative and the hedged item are marked to fair value through earnings.
Question 3
Hard
A company enters into a sale-leaseback transaction. The equipment has a carrying amount of $500,000 and is sold for $700,000, which exceeds its fair value of $600,000. The 5-year leaseback is classified as an operating lease. How should the seller-lessee account for this transaction?
Solution
D is correct.
Under ASC 842, when the sale price exceeds fair value, the excess is not treated as part of the sale. The seller-lessee recognizes gain only to the extent of the fair value over carrying amount (600,000 - 500,000 = 100,000). The excess of sale price over fair value (700,000 - 600,000 = 100,000) is accounted for as additional financing (a financial liability).
Under ASC 842, when the sale price exceeds fair value, the excess is not treated as part of the sale. The seller-lessee recognizes gain only to the extent of the fair value over carrying amount (600,000 - 500,000 = 100,000). The excess of sale price over fair value (700,000 - 600,000 = 100,000) is accounted for as additional financing (a financial liability).
