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Question 1

who is the lessee in a sales-leaseback?

Answer 1

the seller is the lessee whose profit is the diff. b/w SP and BV

Question 2

under GAAP, if lessor is a cap. lease, does lessee have to be cap. too?

Answer 2

yes, in order for lessor to be cap., lesee has to be cap. too

Question 3

how is a refundable and nonrefundable sec. deposit recorded in an op. lease?

Answer 3

• refundable = book as liability til refunded to lessee

* nonrefundable = book as def’d rev til earned

Question 4

what is the net investment in lessor acct. for sales-type lease?

Answer 4

net investment = PV gross investment

Question 5

is lease receivable equal to unearned int inc + sales rev under perspective of lessor for sales-type leases?

Answer 5

yes, unearned int inc + sales rev = lease rec.

Question 6

is the disclosure of impact on fin. leverage for each derivative instrument currently held req’d under GAAP?

Answer 6

no, it is not

Question 7

what are the primary risks with fin. derivatives?

Answer 7

market, credit, and liquidity risk

*not volatility

Question 8

what is a swap contract?

Answer 8

*private agreement that is similar to a series of forward contracts

Question 9

what are futures contracts?

Answer 9

• made through a clearinghouse

* include standardized notional and settlement dates

Question 10

what are forward contracts? (call options)

Answer 10

• negotiated privately b/w 2 parties
• w/o clearinghouse
• do not have standardized notional amt’s and settlement dates

Question 11

does the option buyer always have to pay a premium to the option writer when creating an option contract?

Answer 11

yes, they do

Question 12

what is the floating rate with LIBOR?

Answer 12

floating rate is LIBOR rate + add’l rate

Question 13

where does G/L go for a foreign exchange net invest. hedge?

Answer 13

it goes to OCI

Question 14

would a call option entered into last year expiring in the CY be reported in CY FS’s?

Answer 14

no, it would be reported in prior year’s FS’s

Question 15

what are uses of hedging?

Answer 15

• used to reduce earnings volatility
• an effective hedge occurs when change in value of a derivative offsets change in value of hedged item
• derivatives are used to implement a hedged transaction

Question 16

what is the primary risk assoc’d with an interest rate swap?

Answer 16

credit risk (risk of non-performance)

Question 17

are most derivative instruments measured at FV?

Answer 17

no

*there also may be no req’d initial net investment

Question 18

if a company holds a derivative instrument not designated for hedging purposes, any CF’s from it would be:

Answer 18

CFI act’s on CF statement

Question 19

the derivative/option is often described as “zero-sum game”; what type of risk is involved?

Answer 19

market risk (entity will incur a loss on contract)

Question 20

which derivative instrument is “downside” protection?

Answer 20

purchase of put option (protection if prices fall below strike price)