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CPA - FAR > Chapter 5 - Leases, Liabilities, and Bonds > Flashcards

Chapter 5 - Leases, Liabilities, and Bonds Flashcards

0
Q

Type of annuity when payments are made at the BEGINNING of each period

A

Annuity Due

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1
Q

Type of annuity when payments are made at the END of each period

A

Ordinary Annuity

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2
Q

Formula for Present Value of $1

A

(1+i)^-n

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3
Q

Future Value of $1

A

(1+i)^n

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4
Q

Present Value of an Ordinary Annuity

A

Payments * [(1-(1+i)^-n)/i]

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5
Q

Future Value of an Ordinary Annuity

A

Payment * [((1+i)^n - 1)/i]

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6
Q

How are leasehold improvements depreciated by the lessee?

A

Lesser of:

  • Lease life
  • Asset/improvement life
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7
Q

How do lessors treat the depreciation of an asset?

A

Subtract depreciation from leasing income

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8
Q

How are nonrefundable security deposits treated by lessor and lessee?

A

Lessor: Unearned Revenue
Lessee: Prepaid Rent Expense

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9
Q

How are refundable security deposits treated by lessor and lessee?

A

Lessor: Liability
Lessee: Receivable

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10
Q

Lessee Capital Lease Criteria (US GAAP)

A

Must meet one condition to capitalize “OWNS”
Ownership transfers at end of lease
Written option for bargain purchase
Ninety (90%) of leased asset FV s economic life is being committed in
lease term

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11
Q

Lessee Finance Lease Criteria (IFRS)

A 
"OWESFACS"
Ownership transfers
Written bargain purchase option
Economic life of asset (lease term covers majority)
Substantially all of FV of leased asset (PV of min. lease pmts)
Fluctuations of gains and losses
Ability to continue lease
Cancel lease
Specialized nature
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12
Q

Lessor - Sales Type/Direct Financing Type Criteria (US GAAP)

A

“LUC”
Lessee “owns” leased property
Uncertainties don’t exist regarding the unreimbursable costs incurred
by lessor
Collectibility of lease payments can be reasonably predicted

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13
Q

Profits recognized on Sale-Type Lease

A
  • Gain from Sale

* Interest Income

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14
Q

Profits recognized in Direct Financing Lease

A

Interest Income

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15
Q

How does lessee record capitalization of lease?

A

Lesser of:

  • FV of asset at inception of lease
  • Cost = PV of min lease payments

Include (plus):

  • Required payment
  • Bargain Purchase Option
  • Guaranteed Residual Value

Exclude (minus):

  • Executory Costs
  • Optional Buyout
16
Q

How are initial direct costs of lease paid by lessee affect the leased asset under IFRS?

A

Added to finance lease asset

17
Q

When calculating PV of min. lease pmts, lesses uses which interest rate?

A

Lesser of:

  • Rate implicit in the lease (if known)
  • Lessee’s incremental borrowing rate
18
Q

Capitalized Cost differences in OWNS

A

*Lower of this cost of market

O - PV of pmts + Required Buyout
W - PV of pmts + Bargain Buyout
N - PV of pmts
S - PV of pmts

19
Q

Depreciation Formula of Leased Assets

A

Capitalized Leased Assets

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Depreciable Base 
/ Periods of Benefits
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Depreciation Expense (per period)
20
Q

Depreciation Period of Benefit Differences in OWNS (US GAAP)

A

O - asset’s useful life
W - asset’s useful life
N - lease life
S - lease life

21
Q

Depreciation Period of Benefit (IFRS)

A

Lesser of:

  • Lease term
  • Useful life
22
Q

Rule for Sales Type Lease

A

Cost + Profit = Selling Price

Selling Price = Present Value = FV

23
Q

Rules for Direct Financing Lease

A

PV = Carrying amount of receivable = Cost of asset sold

24
Q

Formula to calculate excess profit on Sale-Leaseback:

  • Operating Lease
  • Capital Lease
A

*Operating Lease
Sale Price

\_\_\_\_\_\_\_\_\_\_\_\_\_
Tentative Gain
*
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Excess Gain
  • Capital Lease - Recorded amount of leaseback asset is lesser of:
  • FV of leased property
  • PV of min lease pmts
25
Q

Accounting by Lessee of Deferred Gains from Excess Profit of Sale-Lease-back (US GAAP)

A

PV of Rent pmts = __% FV of asset

  • Over 90% - Defer all gain and amortize with leased asset
  • 10-90% - Use rules. Defer up to PV of min. leaseback pmts (Operating Lease) or lower of PV of min. leaseback pmts or FV of asset (Capital Lease)
  • <10% - Recognize all gain or loss
26
Q

What is the difference between Real Economic Loss and Artificial Loss?

A

Real Economic Loss - FV < BV –> Recognized immediately
Artificial Loss - Sale Price < FV –> Loss deferred and amortized over
leaseback period

27
Q

Accounting of Sale-Leaseback by Seller/Lessee (IFRS)

  • Finance Lease
  • Operating Lease
A
  • Finance Lease - defer and amortize over lease term
  • Operating Lease
    • Sale Price = FV –> Recognize immediately
    • Sale Price > FV –> Defer and amortize
    • Sale Price < FV –> Recognize immediately
28
Q

Sublease classification.

  • Operating Lease
  • Capital Lease
A

*Original Lease = Operating Lease = Operating Lease
*Original Lease = Capital Lease
O - Capital Lease
W - Capital Lease
N - Operating Lease
S - Operating Lease

29
Q

How to calculate the FV of bond?

A

PV of future interest pmts at MARKET rate

+ PV of principal at MARKET rate

30
Q

How does amortization of bond discount/premium affect interest expense?

A

Bond Discount - Increase interest expense

Bond Premium - Decrease interest expense

31
Q

How are bond issue costs treated differently for US GAAP and IFRS?

A

*US GAAP - Recorded as deferred charge (asset)
- Amortized using straight line method
*IFRS - Not recorded as separate asset; Bond issue costs deducted
from carrying value of liability
- Amortized using effective interest method

32
Q

What is the determination of periodic sinking fund payments?

A

FV of annuity of $1

33
Q

Calculation of gain or loss from extinguishment of debt

A

Reacquisition Price
- Net Carrying Amount
______________________
(Gain) or loss

  Face
- Unamortized Discount
\+ Unamortized Premium
- Unamortized Bond Issue Costs (US GAAP)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Carrying Value
34
Q

What interest rate is used to calculate interest pmts? Stated interest or Market interest?

A

Market Interest Rate

35
Q

What interest rate is used to calculate pmt amounts? Stated interest or Market interest?

A

Stated Interest

CPA - FAR (8 decks)

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