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Copy #1 > Chapter 5: Leases & Bonds > Flashcards

Chapter 5: Leases & Bonds Flashcards

1
Q

When are the payments due in an ordinary annuity? How many interest periods are there?

A

end of period

equal to number of payments

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2
Q

When are the payments due in an annuity due? What makes up the first payment? How many interest periods are there?

A

beginning of period

all principal/no interest

one less than the number of payments

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3
Q

What is an operating lease?

A

Lessee uses asset in a rental agreement (no transfer of ownership)

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4
Q

(Lessee) How do you treat lease rent expense?

A

Expenses over the lease term (straight-line)

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5
Q

(Lessee) How do you treat lease bonus?

A

Prepayment for future expenses

capitalized as an asset & amortized over life of lease (straight-line)

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6
Q

(Lessee) How do you treat leasehold improvements?

A

Capitalized and amortized over the lesser of the remaining life or improvement life

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7
Q

(Lessee) How do you treat rent kicker?

A

expensed as incurred

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8
Q

(Lessee) How do you treat refundable security deposit? Non-refundable?

A

reported as receivable until refunded

capitalized as PPD rent expense

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9
Q

(Lessee) How do you treat free/reduced rent?

A

Take total rent expense & divide evenly over each period (straight-line)

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10
Q

(Lessor) How do you treat cost of property?

A

PPE & depreciated over asset’s useful life (NOT lease life)

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11
Q

(Lessor) How do you treat rental income?

A

income over lease term (straight-line)

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12
Q

(Lessor) How do you treat refundable security deposits? Non-refundable?

A

reported as liability until refunded to lessee

deferred (unearned revenue) until considered earned

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13
Q

(Lessor) How do you treat lease bonuses?

A

deferred (unearned income) & amortized over life of lease

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14
Q

(Lessor) How do you treat free/reduced rent?

A

divide total rental income evenly over all periods

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15
Q

What is a capital lease? What does a lessor call this type of lease under GAAP & IFRS?

A

treated as purchase/sale with ownership & substantially all benefits transferred

GAAP - Sales-type or direct financing

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16
Q

What is the criteria for Lessee capital lease? When can’t you use the N or S?

A

“OWNS”

Ownership Transfers (at end of the lease)
Written buyout/bargain purchase option
Ninety % property FV covered by PV of lease payments
Seventy-five % asset life included in lease term

If lease begins within last 25% of original economic life of property.

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17
Q

What is the Lessor additional criteria for recognizing sales type lease?

A

“LUC”

Lessee owns the leased property (meets OWNS)
Uncertainties do not exist
Collectablility reasonably predictable

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18
Q

What is a sales-type lease? How many profits do you recognize?

A

FV of leased property differs from CV

2 profits
Gain on sale & interest income

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19
Q

What is a direct financing lease? How many profits do you recognize?

A

FV equals CV

1 Profit
Interest Income

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20
Q

What criteria make up a finance lease for IFRS?

A

“OWES FACS”

Ownership transfers (end of lease)
Written bargain purchase option
Economic life (major part)
Substantially all of the years (life)
Fluctuation in g/l from residual payments to lessee
Ability to continue to rent at lower Market
Cancel the lease (lessee can cancel)
Specialized
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21
Q

How does the lessee record lease in finance lease? What is the capitalized amount?

A

Record lease as fixed asset and related liability at capitalized amount

Lesser of FV of asset at inception or the cost

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22
Q

What do you include in the cost of the finance leased asset (lessee)? What do you exclude?

A

PV of all payment lessee is obligated to make
required payment, bargain purchase, guaranteed residual value

executory costs & optional buyout

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23
Q

What are the depreciation periods for finance assets (GAAP)? (IFRS)?

A

GAAP: O or W then estimated economic life
GAAP: N or S then use lease term
IFRS: lesser of the lease term or useful life of asset

24
Q

What is the gross investment (lease receivable) under sales type lease?

A 
Lease payments (include BPO & guaranteed value)
\+ Unguaranteed value (FV at end)
25
Q

What is the net investment (lease receivable) under sales type lease?

A

Gross investment * PV of minimum lease payments

26
Q

What is the unearned interest revenue (lease receivable) under sales type lease?

A

Gross investment - net investment

27
Q

What is the COGS (lease receivable) under sales type lease?

A

Cost of asset (+ initial direct costs) - PV Unguaranteed value

28
Q

When sales price is not given, how do you find it?

A

Cost + Profit = PV / SP / FV

29
Q

What is the gross investment (lease receivable) under direct financing type lease?

A

Lease payment + Unguaranteed value

30
Q

What is the net investment under direct financing type lease?

A

Gross investment * PV

31
Q

What is the unearned interest revenue (lease receivable) under direct financing type lease?

A

Gross investment - net investment

32
Q

What is a sale leaseback? What are the two classifications of sale leasebacks?

A

owner sells property and then instantly leases it back

Operating & capital leases

33
Q

What makes up a discount with bonds? What makes up a premium?

A

Discount: market rate is higher than the stated rate

Premium: Market rate is lower than the stated rate

34
Q

What is a nondetachable warrants?

A

Convertible bond itself must be converted into capital stock

35
Q

What is a detachable warrant?

A

Bond is not converted, only the warrants.

36
Q

What is a term bond? What is a serial bond?

A

Term Bond: single fixed maturity date where entire principal is paid at the end.

Serial Bonds: pre-numbered bonds redeemed by portions

37
Q

What is the JE for bonds sold at par value for borrower? Investor?

A

DB Cash
CR Bond Payable

DB Investment in bonds
CR Cash

38
Q

What is the JE for bonds sold at a discount for borrower? Investor?

A

DB Cash
DB Discount on Bonds Payable
CR Bonds Payable

DB Investment in Bonds
CR Cash

39
Q

What is the JE for bonds sold at a premium for borrower? Investor?

A

DB Cash
CB Premium on Bonds Payable
CR Bonds Payable

DB Investment in Bonds
CR Cash

40
Q

What are bond issue costs and how are they recorded/treated (GAAP)? IFRS?

A

Transaction costs of the bond issue such as legal & accounting fees, underwriting commissions, printing.

Recorded as an asset (DB) and expense using straight line method.

IFRS - Not recorded as separate asset. Deducted from carrying value of liability.

41
Q

What are the two methods for amortizing bond discounts/premiums? Are they allowed for GAAP or IFRS?

A

Straight Line method - not allowed IFRS & usually not GAAP

Effective Interest Method - GAAP & IFRS

42
Q

How do you find the periodic amortization expense each period under straight line method?

A

= (Premium or discount) / # of periods bond outstanding

43
Q

Under the effective interest rate method, what is the interest expense on IS? what is the interest paid on BS? What is the difference between these two amounts?

A

Interest Expense = net carrying value & effective interest rate

Interest Paid = bond face value * coupon rate

Difference is amortization

44
Q

Which method has the higher carrying amount in a bond premium? Higher in a bond discount?

A

Effective Interest Method

Straight Line Method

45
Q

What is a bond sinking fund?

How do the following effect the balance of the fund: additional investments, interest, dividends, admin costs.

A

Separate restricted cash account to pay off entire bond liability at maturity.

Additional Investments: Increase
Interest: Increase
Dividends: Increase
Admin Costs: Decrease

46
Q

How long is bond interest expense recognized for?

A

For the entire period of bond issuance date to fiscal year end.

47
Q

How do you find the value of detachable warrants? What does this increase during issuance?

A

Number of warrants * market price of warrant

Increases stockholders equity

48
Q

Whats the formula to find the interest rates when given the bonds values?

A

GAAP Interest Expense / Carrying amount (beg. of period)

49
Q

What makes up the interest payable formula?

A

Face value of the bonds at the beginning of the period * the stated interest rate

50
Q

What makes up the gross lease receivable account balance?

A

The entire amount of lease payments to be received by the lessor. Annual lease payments * length of lease

51
Q

What happens when a capital lease is modified to a operating lease during the lease?

A

Lease should be categorized as a sale-leaseback.

52
Q

What is the interest expense formula?

A

Carrying amount * effective interest rate

53
Q

What is the cash payment formula?

A

Face amount * states interest rate

54
Q

What consists of the net proceeds to be received from a bond issuance?

A

Issue Price (at market rate) - costs to issue bonds

55
Q

Over what method does the lessee record/expense rent during an operating lease?

A

Straight line method

56
Q

During a sale leaseback, how is gain recorded under a capital lease?

A

Asset valuation account

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