F5 Flashcards
Leases, Liabilities, and Bonds
Leasehold improvements should be depreciated over?
The lesser of:
Lease Life, OR
Asset/Improvement life
What is a Rent Kicker?
A premium rent payment required of Specific Events (threshold)
Example: Percent of Sales over Thresholds (Amount)
Security Deposits: What is the Special Exception?
Nonrefundable - Deferred by the lessor (unearned revenue)
Capitalized by Lessee (prepaid rent expense) until the lessor considers Deposit Earned.
OWNS
Criteria to Capitalize or Finance Lease?
OWNS
- *Ownership** transfer at end
- *Written** option for bargain purchase
- *Ninety** Percent of FV < PV of lease payments
- *Seventy**-five percent or more of economic life of asset
Special Exception to Capitalize Finance?
N and S cannot be used for a lease that begins within the last 25% of economic life.
LUC(K)
Criteria for lessor-Sales type/Financing type Criteria?
LUC(K)
- *Lessee**“owns” the leased property (meets OWNS rule)
- *Uncertainties** not for Unreimbursable costs to be incurred.
- *Collectability** of the lease payments are reasonably predictable.
Recording of the Lease for Lessee?
As an Asset, It is recorded as the smaller/lesser
- Fair Value of the asset at the inception of the lease, or
- Cost = Present value of the minimum lease payments
Costs Included in the lease? (Lessee)
- Required Payments
- Bargain purchase Option (PV of BPO)
- Guaranteed Residual Value (amount guaranteed to the Lessor at PV)
Costs to be excluded in the lease (Lessee)?
- Executory Costs - insurance, maintenance and taxes can be paid by the lessor or lessee
- Optional Buyout (not required and not a bargain)
When calculating the present value of the minimum lease payments, the lessee uses what Interest Rate?
Rate implicit of the Lease. if Known
Lessee’s incremental borrowing rate, lessee’s market rate. NOT Prime Rate
Differences between IFRS and GAAP for costs are?
Initial Direct costs like IFRS, “like legal fees” are capitalized.
Expensed in GAAP.
Formula
How to Depreciate the Asset?
Capitalized Leased Asset
Less: Salvage Value
Equals: Depreciable Basis
Divided by: Period of Benefit
Equals: Depreciation Expense for the Period
How to determine Period of Benefit?
If O or W, use the life of the asset
If N or S, used the term of the lease.
Period of Benefit for IFRS?
Exception of GAAP.
If it is reasonable that lessee will own the leased asset after the lease term, Should be depreciated over the useful life.
What is one important Disclosure for Leases?
Must disclose future minimum payments for the next 5 years. Include executory costs.
Formula
Lessor Accounting: Sales type (Financing) Lease?
Gross Investments
Lease Payment
Plus: Unguaranteed Residual Value
Equals: Gross Investment.
Formula
Net Investment
Lease payment
Plus: Unguaranteed Residual Value
Equals: Gross investment
Times: PV factor
Equals: Net Investment
Unearned Interest Revenue
Gross Investment
Less: Net Investment
Equals: unearned interest Revenue
Cost of Goods Sold
Cost of Asset
Less: PV unguaranteed residual value
Equals: Cost of goods sold
Sales Revenue
Present Value of minimum lease payments is Sales Revenue.
Includes present value of Guaranteed residual Value.
Does not include unguaranteed Residual Value.
Sales Revenue Formula
Cost
Plus: Profit
Equals: Present Value = Selling price = FV
Formula
Recording a Direct Financing Lease: Gross Investment?
Lease Payment
Plus: Unguaranteed Residual Value
Gross Investment
Recording a direct financing lease: Net investment?
Discounted…
Gross Investment
Times: PV factor
Net Investment
Leaseback accounting: What is the Formula?
Sale Price 500,000
Less: Asset Net Book Value 100,000
Equals Tentative Gain 400,000
Less: PVof Minimum Lease payments, deferred 153,000
Equals: Excess Gain 247,000
Leaseback accounting: How do you amortize a Capital Leaseback?
Amortize in proportion of the Amortization of the Leased asset.
IF OW, life of asset. If N,S, lease term
Leaseback Accounting: How do amortize a Operating Leaseback
In proportion to the gross rental expense.
Always use the term of the lease
Leaseback accounting: How to account for the Minor Leaseback? (10% or less of life or sales lease?)
- Gain: No deferral
- Loss: Recognize immediately
- Other losses: Recognize immediately
Leaseback accounting: How to account for the Loss, Net book value is greater than Fair value, in Major and Middle Leasebacks? (Major 90% or more, Middle 90%-10%)
Recognize immediately
Leaseback accounting: How to account for other losses in a Middle or Major Leaseback situation?
Recognize Immediately
Leaseback Accounting: How to recognize gains in a Major leaseback situation?
Defer all and amortize over the leaseback
Leaseback accounting: How to Recognize gains in a middle leaseback accounting situation?
Defer up to the Present value of the Lease back!
Bonds: what is the Carry value formula?
Face + unamortized Premium = Carrying value… OR
Face - unamortized Discount = Carrying value
Bonds: what are bond issue costs?
Legal fees, accounting fees, underwriting fees, and printing costs
Bonds: How do you account for bond issue costs?
Recorded as an asset to be amortized from the date of issuance using the straight-line method.
Bonds: Journal entry for the Bonds with cost?
- Dr: Cash 930,000
- Dr: Discount (includes cost that is amortized) 70,000
- Cr: Bonds Payable 1,000,000
Bonds: how to amortize costs/discounts/premiums with bonds?
The period over which the bond is outstanding. IE the period in which the bond is Sold.
Bonds: How to amortize under IFRS?
The period the expected life of the bond. Not the contractual period.
Straight-line method for amortizing bonds is?
Premuim or discount
Divided by: the number of periods outstanding
Periodic amortization
Straight line method: what is interest expense?
Face value
Times: Stated interest rate
Less: Premium or Discount amortization
Equals: interest Expenses
Straight line method: How to use straight line under IFRS
Straight line is not permitted in IFRS
Discount /Premium affects the carrying value how?
- Discount will increase Carrying value.
- Premium will decrease Premium Value
How will the discount or premium affect the interest rate?
- Discount increase the interest expense.
- Premium decreases the interest expense.
Effective interest method of accounting is permitted under?
GAAP and IFRS
Bond sinking funds are?
Trustee, restricted cash fund, use to pay the bond off at maturity
Bond Sinking Funds: Classification?
Not a current asset. Current asset only to the extent that it offsets a current liability
Bond Sinking Funds: Appropriation is?
Merely an appropriation of Retained Earnings used to show the Share holders that funds are being used Bond sinking fund.
Serial Bonds: What are they
An Alternative to a bond sinking fund
Serial Bonds: How do they mature?
Serial bonds have principals that mature in installments. Serial bonds match maturity dates with cash flow requirements.
Convertible bonds: What are the two accounting methods
- *Book Value Method** - GAAP
- *Market Value Method** - Not GAAP (Still tested)
Convertible Bonds: what is the Book Value Method?
No gain or loss is recognized. At conversion, APIC is credited for the excess of the bonds carrying value.
Convertible bonds: What is the Market Value method?
- Views as a culmination of earnings.
- Recognize a Gain or Loss!!
- APIC is exces of the market price of the stock over par
Warrants is used when?
When the Fair value of the warrant is known!
Warrants: what is the Journal entry?
- Dr: Cash
- Dr: APIC–warrants
- Cr: Common Stock (par)
- Cr: Apic
Warrants: are just like?
Land and building! Fair value of one is known example
Extinguishment of debt: what is the net carrying value?
Carrying value
Less: Amortized costs.
Extinguishment of Debt: Journal Entry
- Dr: Bonds Payable
- Dr: Loss on extinguishment of Bonds
- Cr: Discount on Bonds payable
- Cr: Unamortized bond issue costs
- Cr: Cash
A key difference for convertible bond accounting under IFRS is?
An equity component should be recognized upon issuance equal to the different between the proceeds received and the fair value of the bond liability.
Annuity in Arears vs. Annuity in Advance
Difference between Ordinary Annuity and Annuity Due?
**Ordinary Annuity **- payments are made at end of each period
Annuity Due - payment receipt/occurance happens at beginning of each period.
- Calculating PV, annuity due = -1 payments of ordinary annuity
Present Value of $1
Amount that must be invested now at a specific interest rate so that $1 can be paid or received in the future.
- U.S. Savings Bond
Future Value of $1
Compound interest. Amount that would accumulate at future point in time if $1 were invested now ( > $1 )
- Bank savings account
Present Value of an Ordinary Annuity
Current worth of a series of identical periodic payments to be made in the future.
- Periodic lease/bond payments
- Winning the lottery
Future Value of an Ordinary Annuity
Sum, to be received at some point in the future, of identical periodic investments made from the present until that future point.
Present Value and Future Value of Annuity Due
Add 1 to the present value of an ordinary annuity of 1 for n periods (n + 1). Only the timing is different from an ordinary annuity.
What is an Operating Lease
Includes a lessor, who collects RENT and a lessee who uses the leased asset and pays periodic rent for use.
- No transfer of ownership, or of any risk or benefit of ownership.
OWES FACS
Situations that Lead to Finance Lease Classification (IFRS)
The lease transfers ownership of the asset to lessee by end of lease term.
Lease contains a written bargain purchase option.
Lease term is for the major part of economic life of asset, even if title is not transferred.
Present value of minimum lease payments amounts to at least substantially all of the fair value.
Gains and losses from fluctuation in fair value of of residiual accrue to lessee.
Lessee has ability to continue lease for secondary period at a rent substantially lower than market rate.
Lessee can cancel lease and the lessor’s losses associated with cancelation are born by lessee.
Leased assets are of such a specialized nature that only the lessee can use them without modification.
In a sale-leaseback transaction accounted for under IFRS, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when…?
Seller-lessee
- Accounts for the lease as a finance lease.
- Accounts for the lease as an operating lease and the sales price is above FV