CPA Exam Question

Per ASC Topic 715, the present value of future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date is the accumulated benefit obligation, which is based on current salaries.

A hedge to offset the risk of loss on a recognized asset or liability could be either a cash flow hedge or a fair value hedge, at management’s discretion. If the risk of loss on the recognized asset or liability being hedged is from changes in exchange rates, the hedge would be classified as a cash flow hedge.

This answer is correct because a share-based payment paid to employees in the form of equity is measured at the date of grant.

ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 − $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 − $60,000), and the tax effect of the adjustment is 30% × $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 − $45,000).