Study Materials for 2023 CFA®, FRM®, Actuarial, GMAT® and EA® Exams

Wave Wave

Level II CFA® Program Practice Questions

Offered by AnalystPrep

Only Hard, High-Quality Questions

image1.3 (1)

AnalystPrep’s Question Bank for the Level II CFA Exam

If you ask most CFA charterholders, they will tell you there is only one way to pass the level II CFA exam: practice, practice… and practice like it’s the real exam. This is why AnalystPrep’s method of teaching is better than other preparation materials out there: AnalystPrep provides you with what you will be seeing in your level II exam – item sets. Each item set is made up of a case statement (usually 800-1000 words long) and 6 multiple choice questions with detailed answers.

Level II CFA Exam Item Sets

The Level II CFA exam is often regarded as the most difficult of all the three CFA exams. The team at AnalystPrep believes non-item set practice questions are useless. You want to practice what you will be tested on in the exam! As such, CFA charterholders at AnalystPrep have designed 200 vignette-style item sets, which represent over 1000 practice questions to better prepare each candidate for its level II exam.

How to Get Started?

All item sets from AnalystPrep’s Level II CFA Exam QBank are organized by chapter and cover most of the important concepts that have been tested in past level II CFA exams. Plus, you can do an unlimited amount of personalized quizzes that target specific areas of the curriculum. Simply register a free account to test out 10 item sets (60 free questions) and see why AnalystPrep will help you pass the level II CFA exam!

AnalystPrep Platform plus Mobile

Example Item Set from AnalystPrep's Question Bank

Smart Coffee Growers, SCG, is a U.S.-based society specializing in coffee processing and value addition. In line with its recently approved policy that prioritizes diversification, the society is contemplating an investment in 2 local companies: A chocolate manufacturer – Yummy Bars, and a small scale groundnut company – Natural Nuts Ltd. SCG’s management would like to finalize investment decisions regarding the two entities by January 1, 2017.

SCG wants a 30% stake in Yummy Bars, and the management feels the level of control acquired will be sufficient to allow SCG to be represented on the board. That means society will be able to participate in decision-making and policy-making processes. As such, the society is willing to offer $180 million in cash. Now, the book values of Yummy Bar’s assets and liabilities equal their values, with the exception of a manufacturing plant. Just before the acquisition, the plant has a book value of $24 million, a fair value of $45 million, and useful life of 10 years. The exhibit below provides pre-investment balance sheets and income statements of the two entities.

Exhibit 1
SCG and Yummy Bars Pre-Acquisition Balance Sheets and Income Statements

 

SCG
($ 000)
Yummy Bars
($ 000)
Income Statement
Sales 1,200,000 750,000
Cost of Sales (675,000) (300,000)
Other Expenses (135,000) (60,0000)
Net Income 390,000 390,000
Balance Sheet
Cash 105,000 45,000
Inventory 330,000 255,000
Accounts Receivable 165,000 120,000
Other assets 45,000 30,000
Total Assets 645,000 450,000
Accounts Payable 225,000 180,000
Long-Term Debt 15,000 6,000
Shareholders’ Equity 240,000 180,000
Retained Earnings 165,000 84,000
Total Liabilities and Shareholder’s Equity 645,000 450,000

SCG plans to acquire 100% of the outstanding shares of Natural Nuts Ltd. The society will achieve this by issuing 6 million equity, which has a $1 par value and $30 million current market value. Exhibit 2 below provides pre-acquisition balance sheet information for Natural Nuts Ltd using book values and fair values. The shareholders’ equity figure included in SCG’s pre-acquisition balance sheet (exhibit 1) includes $90 million additional paid in capital, with the remainder attributable to $1 par value common stock.

Exhibit 2
Natural Nut Ltd.’s Pre-Acquisition Balance Sheet using Book Values and Fair Values

 

Book Value
($ 000)
Fair Value
($ 000)
Cash 12,000 12,000
Inventory 7,500 10,500
Accounts Receivable 1,500 1,500
Other Assets 24,000 31,500
Total Assets 45,000 55,500
Accounts Payable 6,000 6,000
Long-Term Debt 15,000 21,000
21,000 27,000
66,000 82,500
Shareholder’s Equity
Common Stock ($1 par) 40,500
Additional Paid-in Capital 18,000
Retained Earnings 13,500

One year following the investment in Natural Nuts Ltd., the carrying value of its steel conversion unit is $4,500,000, while the fair value is $3,750,000. An in-house analyst estimates the fair value of its identifiable net assets to be worth $3,540,000. The steel conversion unit is an independent reporting unit.

Practice Questions

Question 1/6

What’s the amount of goodwill reported on Fisher SCG’s balance sheet immediately following the purchase of Yummy Bars?

A. $0.

B. $45 million.

C. $94 million.

The correct answer is A.

Since the investment in Yummy Bars will provide SCG with board representation in addition to the ability to participate in policy decision-making matters, SCG will have significant influence over the target. Thus, the investment in Yummy Bars should be accounted for via the equity method of accounting.

Under the equity method of accounting, goodwill is not reported separately in the acquirer’s balance sheet. Rather, it’s incorporated as part of the cost of investment. As such, the amount of goodwill to be reported in the balance sheet is $0.

Study Session 5, Reading 16, LOS 16(C): analyze how different methods used to account for intercorporate investments affect financial statements and ratios

Question 2/6

Suppose SCG offered $50 million for the acquisition of Yummy Bars. SCG would most likely:

A. Subject itself to post-acquisition legal suits from Yummy Bars.

B. Recognize the difference between the fair value of Yummy Bars’ assets and the purchase price as a gain in profit and loss.

C. Recognize the difference between the fair value of Yummy Bars’ assets and the purchase price as a loss in profit and loss

The correct answer is B.

$50 million would be considerably less than the fair value of Yummy Bars’ net assets. As such, that would effectively make the acquisition a bargain acquisition. Under both IFRS and US GAAP, SCG would be required to recognize the difference between the fair value of Yummy Bars’ assets and the purchase price as a gain in profit and loss.

Study session 5, Reading 16, LOS 16(b): distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities

Question 3/6

Suppose SCG acquired just 18% of Yummy Bars. Would the society have significant influence over the associate?

A. No, significant influence can only be exercised with a minimum of 30% of voting rights

B. Yes, provided SCG holds at least 50% of board positions

C. Yes, provided SCG is represented in the board

The correct answer is C.

Influence can be exercised with a 20%-50% of voting power. If an investor holds less than 20% of the voting rights, they cannot exert influence unless the such influence can be demonstrated. With 18% of voting power, SCG would be able to exert influence if and only if:

  • It has representatives in the board of directors
  • It can participate in policy formulation
  • It is capable of pulling of material transactions between itself and Yummy Bars
  • There’s interchange of managerial personnel
  • There’s technological dependency

Study session 5, Reading 16, LOS 16(a): describe the classification, measurement, and disclosure under International Financial Reporting Standards (IFRS) for 1) investments in financial assets, 2) investments in associates, 3) joint ventures, 4) business combinations, and 5) special purpose and variable interest entities

Question 4/6

A year into SCG’s investment in Yummy bars, SCG sold $7.5m of inventory to Yummy Bars for $12m. Yummy resold $8m of this inventory during the year. What was SCG’s share of the unrealized profit?

A. $4.5m

B. $1.4985m

C. $0.44955m

The correct answer is C.

SCG’s profit from the sale = $12 – $7.5 = $4.5m

Yummy Bars sells 8/12 = 66.7% of the goods purchased from SCG.

That means 33.3% remains unsold.

Total unrealized profit = 33.3% × $4.5m = $1.4985m

SCG’s share of the unrealized profit = 30% × $1.4985 = $0.44955m

Study session 5, Reading 16, LOS 16(b): distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities

Question 5/6

If the acquisition method of accounting is used for the combination between SCG and Natural Nuts Ltd:

A. SCG will measure the identifiable tangible and intangible assets and liabilities of Natural Nuts Ltd at fair value

B. SCG must not recognize any assets and liabilities that were previously recognized by Natural Nuts Ltd, including patents and brand names

C. Costs that SCG expects (but not obliged) to incur must be recognized as liabilities as of the acquisition date

The correct answer is A.

The acquisition method replaces the purchase method of accounting. Under the new method, all identifiable assets and liabilities of the acquiree (Natural Nuts Ltd.) must be measured at fair (market) value.

Option B is incorrect: SCG would be expected to recognize any assets or liabilities that were previously not recognized by the Natural Nuts Ltd.

Option C is incorrect: SCG would be expected to recognize any contingent liability assumed in the acquisition provided it can be measured reliably and it’s a present obligation rooted in past events. However, costs that SCG expects but which are not an obligation would not be recognized as liabilities as of the acquisition date.

Study Session 5, Reading 16, LOS 16(C): analyze how different methods used to account for intercorporate investments affect financial statements and ratios

Question 6/6

Assuming that one year following the investment in Natural Nuts, the carrying value of goodwill for the steel conversion unit is $600,000. The impairment loss on the unit would be closest to:

A. $0.39m

B. $0.60m

C. $0.21m

The correct answer is A.

The carrying amount of the unit (including goodwill) is higher ($4.5m) than its fair value ($3.75m). This implies that there has been impairment.

Fair market value of the unit $3.75m
Net assets ($3.54m)
Implied goodwill $0.21m
Current carrying value of goodwill $0.6m
Less implied goodwill ($0.21m)
Implied loss $0.39m

Study session 5, Reading 16, LOS 16(b): distinguish between IFRS and US GAAP in the classification, measurement, and disclosure of investments in financial assets, investments in associates, joint ventures, business combinations, and special purpose and variable interest entities

CFA® Program

Level II Study Packages by AnalystPrep

AnalystPrep's study packages for the Level II of the CFA Exam start as low as $249.

Add video lessons and study notes for only $150 extra.

Combine all three levels, with lifetime access and unlimited ask-a-tutor questions for only $699.

Practice Package
$
249
/ 12-month access
  • Question Bank
  • CBT Mock Exams
  • Performance Tracking Tools
Unlimited Package (All 3 Levels)
$
699
/ lifetime access
  • Question Banks for all three Levels of the CFA Exam
  • Mock Exams for all three Levels of the CFA Exam
  • Performance Tracking Tools
  • Video Lessons for all three Levels of the CFA Exam
  • Study Notes for all three Levels of the CFA Exam

Testimonials

“Thanks to your program I passed the first level of the CFA exam, as I got my results today. You guys are the best. I actually finished the exam with 45 minutes left in [the morning session] and 15 minutes left in [the afternoon session]… I couldn’t even finish with more than 10 minutes left in the AnalystPrep mock exams so your exams had the requisite difficulty level for the actual CFA exam.”

Slide Image
James B.

“I loved the up-to-date study materials and Question bank. If you wish to increase your chances of CFA exam success on your first attempt, I strongly recommend AnalystPrep.”

Slide Image
Jose Gary

“Before I came across this website, I thought I could not manage to take the CFA exam alongside my busy schedule at work. But with the up-to-date study material, there is little to worry about. The Premium package is cheaper and the questions are well answered and explained. The question bank has a wide range of examinable questions extracted from across the whole syllabus. Thank you so much for helping me pass my first CFA exam.”

Slide Image
Brian Masibo

“Good Day!
I cleared FRM Part I (May-2018) with 1.1.1.1. Thanks a lot to AnalystPrep and your support.
Regards,”

Slide Image
Aadhya Patel

@AnalystPrep provided me with the necessary volume of questions to insure I went into test day having in-depth knowledge of every topic I would see on the exams.”

Slide Image
Justin T.

“Great study materials and exam-standard questions. In addition, their customer service is excellent. I couldn’t have found a better CFA exam study partner.”

Slide Image
Joshua Brown

“I bought their FRM Part 1 package and passed the exam. Their customer support answered all of my questions when I had problems with what was written in the curriculum. I’m planning to use them also for the FRM Part 2 exam and Level I of the CFA exam.”

Slide Image
Zubair Jatoi

“I bought the FRM exam premium subscription about 2 weeks ago. Very good learning tool. I contacted support a few times for technical questions and Michael was very helpful.”

Slide Image
Jordan Davis
[]