Chapter 6 - Leases

Question 1

At least one criteria must be met for a lease to be capitalized (the lease will be treated as an finance lease by the lessee). (OWNES)

Answer 1

1. Ownership transfer at the end of the lease.
2. Written purchase option the lessee is reasonably certain to exercise.
3. PV of minimum lease pmt = Fair value of asset (approximately 90 % of PV of leased property).
4. Lease term=Major part (75%) of the asset useful life.
5. Asset is specialized such that it has no alternative use to the lessor.

Question 2

The rule about “Failed Sale”

Answer 2

If the underlying lease in a sale-leaseback is a finance lease, it is considered equivalent to a repurchase and will therefore be considered a “failed sale”.

Question 3

A derivative may be qualified as fair value hedge if these criteria met

Answer 3

1. There is formal documentation of the hedging relationship between the derivative and the hedged item.
2. The hedge must be expected to be highly effective in offsetting changes in the fair value of the hedged item, which is assessed at least every three months.
3. The hedged item is specifically identified.
4. The hedged item presents exposure to change in fair value that could affect income.

Question 4

A derivative has three characteristics:

Answer 4

1. it has one or more underlying, and one or more notional amounts or payment provisions, or both;
2. It requires no initial net investment or one that is smaller than would be required for other types of similar contacts;
3. Its terms require or permit a net settlement, or it can readily be settled net outside the contract.

Question 5

How to report effective and ineffective portions of the change in value of a derivative on Fin.Stmt?

Answer 5

1. Gain or losses on the effective potion of cash flow hedge are deferred and reported in the Other Comprehensive Income. Gains & losses must be reclassified and recognize in income in the period it occurred.
2. Changes in the ineffective portion are reported on current income.

Question 6

How to record fair value hedge and cash flow hedge?

Answer 6

Fair value hedge gains and losses are recorded on the income statement, while cash flow hedge gains and losses are recorded as component of other comprehensive income.

Question 7

Which rates to use to convert common stock when translating foreign currency financial statement?

Answer 7

The current year-end exchange rate used for all assets and liabilities to convert to reporting currency. For common stock and paid-in capital are translated using historical cost.

Question 8

The functional currency of a company may be:

Answer 8

1. A foreign entity’s local currency, which the entity keeps its books.
2. The currency in which fin stmt presented (parent company currency).
3. A foreign currency other than the one in which the foreign entity maintains its books.

Question 9

How to record gains from remeasuring subsidiary’s financial statement from the local currency.

Answer 9

If an entity’s books are not maintained in its functional currency, remeasurement into the functional currency required. Any gains or loss included in determining net income and are classified as part of continuing operations.

Question 10

When remeasuring foreign currency fin. stmt into functional currency which of the following items would be remeasured using historical exchange rate?

Answer 10

Only for those balance sheets accounts carried at “cost”. An example: Inventories carried at cost.

Question 11

Which rate to use when translating asses and revenue at end of the year?

Answer 11

Assets will be used the current rate on Dec.31.

Liabilities will be using the weighted average rate for that year.

Question 12

Where report remeasument loss and translation gain?

Answer 12

1. remeasument loss/gain reported on Income Stmt.

2 Translation gain reported at AOCI (accm other compreh income)