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CFA CFA-Level-II Exam Actual Questions
CFA Level II Chartered Financial Analyst (Page 4 )

Updated On: 19-Jul-2026
Page 4 of 145
PDF with 715 Questions

Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia's investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.

Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for €80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia's investment in Midland was €89 million at the end of 2008 and €85 million at the end of 2009. For the year ended 2008, Midland reported net income of €30 million and paid dividends of €10 million. For the year ended 2009, Midland reported a loss of €5 million and paid dividends of €4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.

Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was €20 per share and on December 31, 2009, the market price of Odessa was €17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of €750 million and paid a dividend of €3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson's supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson's research report.

Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent's consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.

Is Stephenson's statement regarding proportionate consolidation correct?

  1. Yes.
  2. No, because under U.S. GAAP, proportionate consolidation is allowed only in very limited situations.
  3. No, because under U.S. GAAP, proportionate consolidation is never allowed under any circumstances.

Answer(s): B

Explanation:

Under U.S. GAAP, the equity method is required in accounting for a joint venture. Proportionate consolidation is not allowed except in very limited situations. Proportionate consolidation is the preferred method for joint venture accounting under International Financial Reporting Standards (IFRS). Therefore, (he statement is not correct. (Study Session 5, LOS 21 .fa)



Bryan Stephenson is an equity analyst and is developing a research report on Iberia Corporation at the request of his supervisor. Iberia is a conglomerate entity with significant corporate holdings in various industries. Specifically, Stephenson is interested in the effects of Iberia's investments on its financial performance and has decided to focus on two investments: Midland Incorporated and Odessa Company.

Midland Incorporated
On December 31, 2007, Iberia purchased 5 million common shares of Midland Incorporated for €80 million. Midland has a total of 12.5 million common shares outstanding. The market value of Iberia's investment in Midland was €89 million at the end of 2008 and €85 million at the end of 2009. For the year ended 2008, Midland reported net income of €30 million and paid dividends of €10 million. For the year ended 2009, Midland reported a loss of €5 million and paid dividends of €4 million.
During 2010, Midland sold goods to Iberia and reported 20% gross profit from the sale. Iberia sold all of the goods to a third party in 2010.

Odessa Company
On January 2, 2009, Iberia purchased 1 million common shares of Odessa Company as a long-term investment. The purchase price was €20 per share and on December 31, 2009, the market price of Odessa was €17 per share. The decline in value was considered temporary. For the year ended 2009, Odessa reported net income of €750 million and paid a dividend of €3 per share. Iberia considers its investment in Odessa as an investment in financial assets.
In addition, Iberia has a number of foreign investments, so Stephenson's supervisor has asked him to draft a report on accounting methods and ratio analysis. The following are statements from Stephenson's research report.

Statement 1: Under U.S. GAAP, firms are required to use proportionate consolidation to account for joint ventures.
Statement 2: In general, if the parent's consolidated net income is positive, the equity method reports a higher net profit margin than the acquisition method.

Is Stephenson's statement regarding the effect on profit margin correct?

  1. Yes.
  2. No. Net profit margin will be lower using the equity method.
  3. No. Net profit margin will be the same using either the equity method or the acquisition method.

Answer(s): A

Explanation:

In a profitable year, net profit margin (net income/sales) will be higher under the equity method because sales are lower under the equity method. Acquisition includes the sales figures for both the parent and subsidiary while the equity method only includes the sales figure for the parent company. Net income is the same under both methods. Therefore, the statement is correct. (Study Session 5, LOS 21.c)



Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.
Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.

Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski's employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.

Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.

This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.

Is Carson correct with respect to defined contribution plans?

  1. Both statements are incorrect.
  2. Only Statement 1 is incorrect.
  3. Only Statement 2 is incorrect.

Answer(s): A

Explanation:

Statement 1: Employers often face onerous disclosure requirements—incorrect; the accounting is quite simple and the onerous disclosure requirements are more characteristic of defined benefit plans.
Statement 2: Employers often bear all the investment risk—incorrect; benefits received by each individual employee on retirement depends on the investment performance of each individuals personal retirement fund. Thus, the employees bear the investment risk.

Therefore, both statements arc incorrect. (Study Session 6, LOS 22.a)



Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.

Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.
Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski's employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.

Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.

Under current U.S. GAAP pension accounting standards, the amount of the pension asset or liability that Samilski should report on its 2009 fiscal year end balance sheet is closes/ to a:

  1. $4 million liability.
  2. $10 million liabilily
  3. $14 million liability

Answer(s): A

Explanation:

Under current U.S. GAAP pension accounting rules, which apply 10 firms with fiscal year ends after December 2006, Samilski will report the funded status of the plan on its balance sheet.

funded status = fair market value of plan assets less PBO
= $316 milli on less $320 million
= $4 million underfunded
Therefore. Samilski will report a $4 million liability on its balance sheet. (Study Session 6, LOS 22.b)



Andrew Carson is an equity analyst employed at Lee, Vincent, and Associates, an investment research firm. In a conversation with his supervisor, Daniel Lau, Carson makes the following two statements about defined contribution plans.

Statement 1: Employers often face onerous disclosure requirements.
Statement 2: Employers often bear all the investment risk.

Carson is responsible for following Samilski Enterprises (Samilski), a publicly traded firm that produces motorcycles and other mechanical parts. It operates exclusively in the United States. At the end of its 2009 fiscal year, Samilski's employee pension plan had a projected benefit obligation (PBO) of $320 million. Also, unrecognized prior service costs were $35 million, the fair value of plan assets was $316 million, and the unrecognized actuarial gain was $21 million.

Carson believes the rate of compensation increase will be 5% as opposed to 4% in the previous year, and the discount rate will be 7% as opposed to 8% in the previous year.
This past year, Samilski began using special purpose entities (SPEs) for various reasons. In preparation for analyzing the SPE disclosures in the footnotes to the financial statements, Carson prepares a memo on SPEs. In the memo, he correctly concludes that the company will be required under new accounting rules to classify them as variable interest entities (VIE) and consolidate the entities on the balance sheet rather than report them using the equity method as in the past.

Based on Carson's projections of the discount rate, what are the likely effects on the projected benefit obligation (PBO) and the pension cost?

  1. Both will increase.
  2. Both will decrease.
  3. One will increase and the other will decrease.

Answer(s): A

Explanation:

A lower discount rate increases the PBO. It also increases the overall pension expense by increasing the service cost and, most likely, the interest cost. (For mature plans, a higher discount rate might increase interest costs. In rare cases, interest cost will increase by enough to offset the decrease in the current service cost, and pension expense will increase.) (Study Session 6, LOS 22.c)



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