Transactions — CPA FAR practice questions

Under ASC 815, all derivatives are recognized on the balance sheet as:

1. Off-balance-sheet items with only footnote disclosure required
2. Historical cost amounts amortized over the life of the contract
3. Contingent items recognized only at settlement of the contract
4. Assets or liabilities measured at fair value each period reported

Answer: D — Assets or liabilities measured at fair value each period reported

D) Correct - a derivative is recognized at inception and remeasured to fair value at every reporting date. A) Off-balance-sheet treatment is exactly what the standard eliminated. B) Amortized cost applies to debt held at cost. C) Recognition begins at inception, not settlement.

Debt extinguishment gain or loss is calculated as:

1. Carrying amount minus the reacquisition price of the debt extinguished
2. Reacquisition price minus the carrying amount of the debt extinguished
3. Face value minus the current market price of the debt extinguished
4. Present value of remaining payments minus the reacquisition price paid

Answer: A — Carrying amount minus the reacquisition price of the debt extinguished

A) Correct - carrying - reacquisition price. B) That reverses the sign. C) Face value ignores unamortized discount. D) That is a valuation calculation.

To qualify as the primary beneficiary of a VIE, a reporting entity must have BOTH of which two characteristics?

1. A majority voting interest in the VIE and a majority of the total equity investment at risk
2. Representation on the VIE's board and an active management services agreement with the entity
3. Power over the activities that most affect the VIE's economic performance, and significant economics
4. A related-party relationship with the other variable interest holders and a guarantee of VIE debt

Answer: C — Power over the activities that most affect the VIE's economic performance, and significant economics

A) VIEs are, by definition, entities where voting interests do not indicate control, so a majority voting/equity interest is not the relevant test. B) board representation and a services agreement may be relevant facts but are not themselves the two defining criteria the standard requires. C) correct - ASC 810 requires both the power criterion (direction of significant activities) and the economics criterion (potentially significant losses/benefits) to identify the primary beneficiary. D) a related-party relationship or a guarantee may be relevant to the broader analysis but do not themselves constitute the two required primary beneficiary criteria.

A reporting entity holds a variable interest in a VIE but was not previously its primary beneficiary. The entity then acquires an additional variable interest, increasing its involvement with the VIE. What is the NEXT required step under ASC 810?

1. No action, since primary beneficiary status is fixed permanently at the date the VIE is formed
2. Reassess whether it now has both power over the significant activities and significant economics
3. Conclude it is now the primary beneficiary solely because its variable interest has increased
4. Nothing, because this reassessment applies to voting interest entities rather than to VIEs

Answer: B — Reassess whether it now has both power over the significant activities and significant economics

A) primary beneficiary status is not permanently locked in at formation; acquiring an additional interest is exactly the kind of event that can change the analysis. B) correct - acquiring an additional variable interest is a reconsideration event, prompting reassessment of both required criteria (power and potentially significant economics) under the current facts. C) an increased interest alone does not automatically confer primary beneficiary status without satisfying both required criteria. D) this reassessment framework specifically addresses VIEs; voting interest entities are evaluated under separate consolidation guidance.

The Black-Scholes option pricing model uses which inputs to value employee stock options?

1. Book value of equity and the return on equity for the past decade
2. Forecast cash flows, a discount rate, and a terminal growth rate
3. Historical earnings per share and average daily trading volume
4. Stock price, strike, volatility, term, risk-free rate, dividend yield

Answer: D — Stock price, strike, volatility, term, risk-free rate, dividend yield

D) Correct - these six inputs drive the option's grant-date fair value. A) Book value and return on equity are accounting ratios, not pricing inputs. B) Those are discounted cash flow inputs for valuing a business. C) EPS and volume affect price but are not model inputs.

A company's short-term debt maturing within the next 12 months is intended to be refinanced, but as of the financial statement issuance date, management has only an informal verbal understanding with the lender and no signed agreement. The debt should be classified as:

1. Noncurrent, since management's demonstrated intent to refinance controls
2. Current, since intent without a binding agreement cannot support deferral
3. Split by management's estimated probability of closing the refinancing
4. As a contra-liability pending settlement of the final refinancing terms

Answer: B — Current, since intent without a binding agreement cannot support deferral

B) correct - an unsigned understanding leaves the maturity within twelve months enforceable, so the obligation stays current. A) Intent alone is not the criterion; ability evidenced by a commitment is. C) Probability weighting is not a classification method. D) No contra-liability presentation exists for pending refinancings.

A warrant includes a provision requiring the issuer to make the holder whole in cash if the issuer fails to timely deliver registered shares upon exercise (a "tainted" settlement provision). This feature would MOST likely cause the warrant to be classified as:

1. Permanent equity, since a registration delay is an event outside the issuer's control
2. Mezzanine equity, treating the make-whole payment as a conditional redemption feature
3. A financing liability accreted to the make-whole amount using the effective interest method
4. A liability remeasured to fair value each period, since cash settlement may be required

Answer: D — A liability remeasured to fair value each period, since cash settlement may be required

D) correct - a provision that can force a cash payment the issuer cannot avoid precludes equity classification, so the warrant is a liability carried at fair value. A) That the delay is outside the issuer's control is exactly why equity classification fails. B) A cash make-whole points to liability, not mezzanine, classification. C) Accretion on a fixed schedule is not the measurement basis for a liability-classified warrant.

For a liability-classified SAR award, compensation cost recognized in a given period is measured as:

1. Fair value remeasured each period, trued up over the service period
2. Grant-date fair value, fixed at grant and never subsequently adjusted
3. Grant-date intrinsic value, recognized in full in the period of grant
4. Cash paid on exercise, recognized entirely in the period of settlement

Answer: A — Fair value remeasured each period, trued up over the service period

A) correct - a liability award is revalued each period and the cumulative cost recognized is the current fair value applied to the portion of service rendered. B) A frozen grant-date measure describes equity classification. C) Full recognition at grant ignores the service still to be rendered. D) Waiting for the cash payment defers cost out of the periods that benefited.

Under ASC 805-50, when a business is transferred between entities under common control, prior period financial statements of the receiving entity are:

1. Not restated; the transfer is reflected prospectively from the date control transferred
2. Restated only when the transferring entity is an SEC registrant or public business entity
3. Restated for the current year only, leaving comparative periods as previously reported
4. Retrospectively combined for all periods presented during which common control existed

Answer: D — Retrospectively combined for all periods presented during which common control existed

D) correct - because the entities were commonly controlled throughout, combining them for every period presented depicts the economics, much as a pooling did. A) Prospective treatment would break comparability across the periods shown. B) Registrant status has no bearing on the restatement requirement. C) Restating only the current year leaves the comparatives inconsistent with it.

Under ASC 810, consolidation of a subsidiary is required when the parent:

1. Owns 20% or more of voting stock regardless of control
2. Has significant influence but not majority ownership over the entity
3. Owns any amount, however small, of the subsidiary's common stock
4. Has control, typically >50% voting or VIE primary beneficiary status

Answer: D — Has control, typically >50% voting or VIE primary beneficiary status

A) 20-50% triggers equity method, not consolidation. B) Significant influence is equity method territory. C) Consolidation requires control, not mere ownership. D) Correct - control triggers consolidation.

Does impairment of an operating lease ROU asset convert the lease to a finance lease?

No — impairment doesn't reclassify lease type; classification depends on the lease classification criteria at commencement or a triggering reassessment/modification event.

Balance sheet placement of temporary equity?

Between total liabilities and permanent stockholders' equity, in its own section.

SAR compensation cost driver?

Appreciation in stock price above the grant/base price over the requisite service period.

Finance lease criteria?

Transfer ownership, bargain purchase option, lease term ≥ 75% useful life, PV of payments ≥ 90% fair value, specialized asset.