F4 - Liabilities Flashcards
Unearned Revenue for a Coupon
Is recorded at the Coupon Sales Price
Contingent Liability
Probable and estimateable accrue
Reasonably Possible Disclose only
A gain is never recorded
A range that is probable and estimateable pick the lower amount to accrue
Deferred Compensation
The cost of the benefits should be associated with the service period required
RULE: LONG-TERM DEBT
If it matures within 1 yr it should be classified as a current liability
UNLESS
Retirement is to be accomplished with other than current assets
To Determine Bonus or Incentives for Officers
Bonus = (Pretax Income after bonus X Bonus %) / ( 1+ Bonus % )
Solve to get Income before tax first then solve for this.
If Related Party transactions are mentioned
(Like for Contingencies)
They have to be disclosed
Contingent liabilities which are remotely possible are neither accrued nor disclosed
EX:
Related party can be a home of a president is being guaranteed by indebtedness
BC Dollar-Value LIFO Inventory
Measures inventory in dollars and uses price index to adjust for changing price levels (inflation/deflation),
It best reflects the true economic value of the inventory
NWC = Net Working Capital
Current Assets - Current Liabilities
Operating Cash Flow Ratio
Operating Cash Flow / Total Current Liabilities
Debt Covenant
A rule set by lenders in loan agreements that requires the borrower to meet certain financial conditions to reduce risk and ensure the borrower’s financial health.
If Debt Covenant isn’t met…..
Covenant is violated
Lender may impose penalties
Like increase rate
Demanding accelerated repayment
Restrict future borrowing
Declaring the loan in default
Debt-to-Equity Ratio
Measures company Financial Leverage
Total Debt / Total Equity
Current Ratio
Current Assets / Current Liabilities
Int Coverage Ratio
EBIT / Int Exp
If a bond is issued at a premium and redeemed at a discount to par
A gain is booked
Booked in Continuing Operations
If a bond is issued at a Discount and redeemed at a price above par
A loss is booked
BC you are paying more to get rid of the debt (liability)
In-Substance Defeasance
“Freezes” the payment of principal and interest until a later time
The debtor is still the primary obligor, so the liability remains on the debtor’s books
Amortization for an ROU
IF Purchase Option or Ownership Transfers use the useful life of the asset
IF it does NOT then use the lease term
Amortization for Leasehold Improvements
Use shorter of the lease term or the asset’s useful life
UNLESS
The lease is reasonably certain to be renewed - if it is then use renewal period
Lease Incentives and Monthly Lease Expense
Take into account when calculating total lease payments
and spread evenly through the Lease term
Calculating Finance Lease Int Exp
Get PV of the lease payments
Apply implicit rate
Adjust the lease carrying amount for principal redution to calculate interest for subsequent years
Amortization of ROU w / Residual Value
ROU asset value - Residual value / Useful Life
Dealing with ROU Assets
If if contains a bargain purchase option
Use the useful life of the asset NOT lease period to calculate amortization
To record at lease inception:
PV of Lease payments + PV of Purchase Option = Is the ROU asset / Useful Life
