Sample Questions
Question 1
Easy
Defined contribution pension plan notes must explain:
Solution
C is correct. Defined contribution plan notes describe how contributions, investment results, expenses, and forfeitures affect participant accounts, including permitted forfeiture uses. An actuarial benefit obligation is not needed for these disclosures to apply.
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
ParentCo owns 60% of SubCo. During the year, SubCo sold land to ParentCo for $800,000; its carrying amount on SubCo's books was $500,000. ParentCo holds the land at year-end. What consolidation adjustment is required for this upstream intercompany transaction?
Solution
A is correct.
In consolidation, 100% of intercompany gains must be eliminated regardless of the ownership percentage. For upstream sales (sub to parent), the elimination reduces SubCo's income, which means the NCI bears its proportionate share (40% x 300,000 = 120,000). The land is restated to its original cost of 500,000.
In consolidation, 100% of intercompany gains must be eliminated regardless of the ownership percentage. For upstream sales (sub to parent), the elimination reduces SubCo's income, which means the NCI bears its proportionate share (40% x 300,000 = 120,000). The land is restated to its original cost of 500,000.
