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F5 Flashcards

1
Q

What is the PV formula?

A

PV = Future Value X PV factor

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2
Q

How are bargain purchase options accounted for under leases?

A

Included as part of the minimum lease payments to be discounted to the date of inception of the lease because it is a future cash flow that is considered certain.

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3
Q

What amount of deferred gains are recognized when the sale-leaseback when “substantially all” rights are retained?

A

Defer all gain and amortize over the leased asset.

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4
Q

How is a Lease Bonus accounted for?

A

Amortized using the SL method over the life of the asset

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5
Q

Where is guaranteed residual value included in Capital Lease?

A

An additional lease payment and must be included in the calculation of the PV of the minimum lease payments

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6
Q

What is the criteria for Capitalized life?

A

O- Ownership transfers at end of lease
W-Written option for bargain purchase
N-Ninety (90%) of leased property FV less than or greater PV of lease payments
S-Seventy-five (75%) or more of asset economic life is being committed in lease term

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7
Q

PV of $1?

A

PV of $1 => Amt that must be invested now at a specific interest rate so that $1 can be paid or recieved in future
EX: US Bonds, Captial Lease Buyout (at end lease), Bond Principal Buyout (at end of term)

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8
Q

Future Value of $1

A

Future Value of $1 => Compound interest

EX: Bank Savings Account

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9
Q

PV of Ord Annunity

A

PV of Ord Annuity => Current worth of a series of identical periodic payments
EX: Periodic Lease Payments, Periodic Bond Payments, Winning the Lottery

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10
Q

Future Value of Ord Annuity

A

Future Value of Ord Annuity => Sum to be received at some point in the future, of identical periodic investments made from the present to that future point
Ex: Investing in an IRA

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11
Q

PV & Future value of annuity due?

A

PV & Future Value of Annuity Due => Ord → Annuity Due (Timing of Payments
PV of Annuity Due = PV of Ord Annuity + 1

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12
Q

Lessee J/E for Rent Expense

A

DR: Rent Exp
CR: Cash/Rent payable

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13
Q

How to Treat… (Lessee)

  1. Lease Bonus
  2. Leasehold improvements
  3. Rent Kicker
  4. Refundable Sec Deposit
  5. Free or reduced rent consideration
A

Lease Bonus = Asset & Amort (SL) over lease life

Lease improvements = Capitalize & Depreciate over lesser of lease or asset life

Rent Kicker: Prem for certain events = period exp

Refundable Sec Deposit = Asset until refunded by lessor

Free or reduced rent consideration = SL

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14
Q

Lessor Accounting

For the leased item…

A

FA = Depreciate over assets useful life

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15
Q

J/e for Lessor Rental Income

A

DR: Cash/Rent Receivable
CR: Rental Income

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16
Q

Lessor— Treatment of Sec Dep

A

-Non-refundable: Deferred by lessor (unearned rev) & Capitalized by lessee (prepaid rent exp)
-Refundable: Receivable by the lessee & Liability by the lessor
DR: Cash
CR: Refundable Deposit

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17
Q

GAAP - Lessee Capital Lease Criteria (must meet at least 1)

A

O - Ownership transfers at the end of the lease (required buyout)

W - Written option for bargain purhcase (bargain buyout)

N - Ninety (90%) of Leased property FV <= PV of lease payments (no optional buyout)

S - Seventy Five (75%) or more of asset economic life (no optional buyout)

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18
Q

Lessee J/E for capitalized asset

A

DR: FA - Leased property
CR: Liability - obligation under capital lease

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19
Q

IFRS Capital Lease Criteria

A

Both lessee and lessor classify a lease as a finance lease if the lease transfers substantially all risks & rewards of ownership to the lessee

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20
Q

GAAP Lessor - Sales Type/Direct Financing Type Criteria (must meet all 3)

A

L - Lessee owns the leased property (meets one of the OWNS)

U - Uncertainities do not exist regarding any unreimburseable costs to be incurred by the lessor

C - Collectibility of the lease payments is reasonably predictable

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21
Q

Profits for Lessors from

  1. Sales-Type
  2. Direct Financing
A
  1. Gain on sale and Interest income

2. Interest income

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22
Q

Lessee Accounting for Capital(Finance) Lease

J/E

A

Dr: FA - leased property
CR: Liability - obligation

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23
Q

What to include in the Capitalized amount of the lease for the Lessee?

A

Records the lease as an asset and a liability at the lower of:

(1) FV of the asset at the inception of the lease
(2) Cost = PV of the min lease payments

  • Include: Required payments, Bargain purchase option, Guaranteed Residual Value
  • Exclude: Executory Cost (ins, main, taxes), Optional buyout
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24
Q

How to calculate the PV of min lease payments=

A

Periodic Payment = (Beg of period = PV of ann due / End of period = PV of ord ann)

Bargain Pur Option / Guarenteed Residual = PV of $1

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25
What interest rate to use when calculating the PV of min lease payments
Lesser of Rate Implicit or Incremental rate (Market rate)
26
Depreciation of the Asset (Lessee)
SL GAAP = ~O & W = Asset Life ~N & S = Lease Life IFRS: ~ Short of the lease term and the useful life of the asset
27
Lessor Accounting = Recording the Sales Type and Direct Financing Lease Gross Investment Net Investment Unearned Interest Revenue
Gross Investment: Lease Payment + Unguaranteed Residual Value (Est FV at end) = Gross Investment Net Investment: Gross Investment X PV = Net Investment Unearned Interest Revenue: Gross Investment - Net investment = Unearned Int Rev
28
Lessor Accounting Sales Type Lease COGS
COGS Cost of Asset - PV unguaranteed residual value (what you get back) = COGS N/A to Direct Financing
29
Lessor J/E to record the sales-type lease:
``` J/E to record the sales-type lease: DR: Lease Payments receivable CR: Unearned Interest Income CR: Sales Revenue and DR: COGS CR: Inventory ```
30
Lessor J/E to record direct financing l
DR: Lease payments receivable (gross investment) CR: Unearned Int Rev (contra-lease receiv) CR: Asset
31
Excess Profit on Sale-Leaseback for Operating Lease Capital Lease
``` Operating Lease Excess Profit = Rent Back: Sale Price -Asset NBV =Tentative Gain (Gain on Sale) - PV min lease payments (Give back) = Excess Gain ``` ``` Capital Lease Excess Profit = Owns back: Sale Price -Asset NBV =Tentative Gain (Gain on Sale) - Leaseback Asset (Give Back) = Excess Gain ```
32
Sale Lease Back Deferred Gain (Substantially All Rights Retained = greater than 90%) ~Gain ~Loss(NBV > FV) (real economic losses) ~Other Losses (artificial loss)
~Defer all (amort over leaseback) ~Recognize Immediately ~Defer all (amort over leaseback)
33
Sale Lease Back Deferred Gain (Rights retained are less than substantially all (10%-90%) ~Gain ~Loss(NBV > FV) (real economic losses) ~Other Losses (artificial loss)
~Defer (up to PV of leaseback) (amort over leaseback) ~Recognize Immediately ~Defer all (amort over leaseback)
34
Sale Lease Back Deferred Gain (Minor portion of rights retained by seller-lessee less than 10%) ~Gain ~Loss(NBV > FV) (real economic losses) ~Other Losses (artificial loss)
~No Deferral ~Recognize Immediately ~Recognize Immediately
35
IFRS- Sale Leaseback
~Finance Lease - Any profit from the sale-leaseback trans is deferred and amort over the lease term ~Operating Lease - Pofit or loss from the sale leaseback transaction is recognized
36
Sublease Classification by Original Lessee and Sublessee :
O/W = Captial Lease / N/S = Operating Lease
37
Bonds are usually denominated in
$1000s
38
How is the price quoted for bonds
100s (% of par value)
39
What is an indenture?
is a contract for purchase of bond
40
What is coupon rate?
the stated interest rate on the bond
41
Bond Interest (Check amt)
=Coupon Rate X Face (Bonds generally pay int semi-annually in the US and annually in other countries
42
What is the principal payoff on a bond?
is always the full face amount
43
What is a premium/discount on a bond?
is the result of the buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest
44
How to calculate Bonds Issued at Par
(Stated Rate = Market Rate) ~Principal = PV of $1 x Face (full) ~Interest = Annuity of $1 x payment
45
Bonds Issued at Par (Stated Rate = Market Rate) Borrower J/E? Investor J/E?
Borrower: DR: Cash CR: Bond Payable Investor DR: Investment in Bonds CR: Cash
46
Bonds Issued at a Discount (Stated Rate < Market Rate) Borrower J/E? Investor J/E?
Borrower DR: Cash DR: Discount on Bonds Payable CR: Bond Payable Investor DR: Investment in Bonds CR: Cash
47
Bonds issued at a Premium (Stated rate > Market Rate) Borrower J/E? Investor J/E?
Borrower Dr: Cash CR: Prem on Bonds Payable CR: Bonds Payable Investor DR: Investment in Bonds CR: Cash
48
What is the CV formula for a bond?
Face +/- Unamortized prem/disc = CV
49
What are Bond Issue Cost? J/E? IFRS treatment of bond issue cost?
trans cost of the bond issue (Recorded as deferred charge & amort using SL) DR: Cash DR: Discount DR: Bond Issue Cost (Asset) CR: Bond Payable IFRS: Bond Issue cost deducted frin CV
50
How to calculate SL Amort of Disc or Prem
(nor permitted under IFRS) Periodic AMortization = Premium or Discount / # of periods bond is outstanding Interest Expense = (Face value x Stated Int Rate) - Prem amort or Plus discount amort
51
What is the layout of amortization table
Date Net Carrying Value SL Amortization Face X Coupon (B/S - J/E impact) Paid + Discount - Premium (I/S - J/E impact)
52
J/E for SL amortization (Borrower) At Issue date Interest Expense
Issue Date DR: Cash DR/CR: Discount/Prem on bonds payable CR: Bond Payable Interest Exp *Same J/E each Period DR: Bond Interst Exp DR/CR: Prem/Disc on bonds payable CR: Cash
53
J/E for SL amortization (Investor) At Issue date Interest Expense
Issue Date DR: Investment in Bonds CR: Cash Interest Exp DR: Cash DR/CR: Investment in Bonds (DR:disc/CR:prem) CR: Bonds Int Rev
54
Amortization Table for Effective Interest Method of Bonds
Date Beg of Period NCV Semi-Annual Amort Int NCV X Effective (IS) Face X Coupon (BS) Amort (Differ b/n above 2) End of Period NCV *Tip: Prem = Subtract Amort & Disc = Add amort
55
J/E For Effective Rate Bonds (Borrower) Issue? Interest Expense?
``` Issue: DR: Cash DR/CR: Discount/Prem on Bond Payable CR: Bonds Payable ``` Interest - Differ dollar amts each period: DR: Bond Int Expense DR/CR: Prem/Discount on Bonds Payable CR: Cash
56
J/E For Effective Rate Bonds (Investor) Issue? Interest Expense?
Issue DR: Investment in Bonds CR: Cash Interest-different dollar amt each period DR: Cash DR/CR: Investment in Bonds (DR:Disc/CR: Prem) CR: Bond Interest Rev
57
J/E for bonds issued b/n Interest Rates J/E for First Interest Payment
~J/E - Accrued interest entry DR: Cash DR: Discount Bonds Payable CR: Bonds Payable CR: Bonds Interest Expense (or payable) =(Face X Int X Time) ~J/E for first interest payment DR: Bond Int Expense CR: Cash
58
Year-End Bond Interest Accrual ~ J/E to record int accrual ~J/E to record discount amort
~J/E to record int accrual DR: Interest Expense CR: Int Payable ~J/E to record discount amort DR: Interest Expense CR: Discount on Bonds payable
59
Bond Sinking Fund Classification Bond Maturity Value Formula
~generally non current (future value of an annuity or ord annuity) ~Bond Maturity Value = Periodic payments X Future value of an annuity
60
J/E to record the sinking fund J/E to record the first semi-annual interest payment to the fund
J/E to record the sinking fund DR: Bond Sinking Fund (asset) CR: Cash J/E to record the first semi-annual interest payment to the fund DR: Bond Sinking Fund CR: Interest Revenue (Semi-annual pymnt X Interest Rate)
61
Convertible Bonds GAAP and IFRS?
Convertible Bonds = Nondetachable Warrants ~GAAP: The issuance price is allocated to the bonds with no recognition on the conversion feature b/c it is difficult to assign a specific value to conversion feature ~IFRS: Everything goes to bond at issuance
62
2 Methods for convertible bonds
Book Value method (GAAP) Market Value Method (not GAAP- but tested)
63
Book Value Method:
GAAP (No IS impace/ CS & APIC only) - No G/L recognized - At conversion the bond payable and related prem/disc are written off & CS is credited (at par) - APIC is credited for the excess of the bonds CV over the stock’s par value less any conversion costs
64
J/E for Borrower of Book Value method of Convertible Bonds J/E for Book Value Method when they are converted
~Original DR: Cash CR: Bond Payable CR: Prem on Bond Payable ``` ~Converted DR: Bond Payable DR: Prem on Bond Payable CR: CS CR: APIC ```
65
J/E for Borrower of Mkt Value method of Convertible Bonds J/E for Mkt Value Method when they are converted
Market Value Method: Not GAAP but tested ~Original DR: Cash CR: Bond Payable CR: Prem on Bond Payable ``` ~~Conversion J/E: DR: Bond Payable (# of bonds x Face) DR: Prem on bond (bond sold for - face) DR: Loss on conversion (Plug) CR: CS (par x #) CR: APIC ((FV - Par) x #) ```
66
Bonds with detachable warrants
~Acct for separately ~Conversion feature that is sep from a sec should be accted for sep, and a value should be assigned to it ~Conversion feature = FV at time ~Credit to APIC
67
Bonds with detachable Warrants J/E of issuance
~Issuance J/E DR: Cash CR: Bond Payable CR: APIC Warrants
68
What are the... warrants only method: Market value method:
~Warrants Only method: used is only FV of the warrants is known ~Market Value Method: Used if FV of both bonds/warrants are known
69
J/E for Exercise of Detachable Warrants
~Exercise Detachable warrants: (No bond impact) DR: Cash DR: APIC --Warrants (Reverse) CR: CS (at par) CR: APIC
70
Gain/Loss on Bond Extinguishment before maturity
~Adjust items in the FS ~Bond issue costs reported as an asset under GAAP ~Any related unamortized disc or perm, and ~Difference b/n the face and reacquisition proceeds
71
Calculation of the G/L on bond extinguishment Reacquisition Price Carrying Value
(Gain) or Loss = Re acquisition Price - NCV Face X % paid =Face - unamort dis + unamort prem - unamort issue cost = CV
72
G/L on bond extinguishment J/E for Loss J/E for Gain
``` Loss DR: Bond Payable DR: Loss on Extinguishment of bonds CR: Disc on Bond Payable CR: Unamortized bond issue cR: Cash ``` ``` GAIN DR: Bond Payable DR: Prem on Bond payable CR: Cash CR: Unamort bond issue cost CR: Gain on extinguishment of bonds ```

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