Blending options / knockout functionality problem in PS CC 2014

Question

Hello!
I've been experimenting with blending options and especially the knockout effect recently, and have discovered that it's function doesn't appear to work correctly.
For example:
If I have a basic three layer setup as described under;
The only way to get the intended functionality out of knockout seems to be to use the original prelocked background layer. I have not been able to duplicate the results in the first image with any other combination of layering, blending options or layer groups. To the best of my ability, I cannot fathom a way for the knockout settings to have an impact on the image in any other condition than the one mechanically identical to the first image.
So my question is in two parts, have I discovered a bug and this is not the way the knockout function is supposed to work? Or if not, am I going about this the wrong way; how the knockout function is supposed to be used and how it's intended to work?
Obviously the same effect can be achieved through masking and a few more destructive means, but the simplicity of the knockout would be far superior if it were to work properly - the way I imagine it should.
Thank you for your input!

Answer 1

Maybe this will help understand the knockout function better
http://helpx.adobe.com/photoshop/using/knockout-reveal-content-layers.html#knockout_to_rev eal_content_from_other_layers
In your third example, one needs to have a "Real" background layer.
That can be done by going to Layer>New>Background from Layer.
(a photoshop document can only have one background layer)