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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
Q

What interest rate to use when calculating the PV of min lease payments

A

Lesser of Rate Implicit or Incremental rate (Market rate)

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26
Q

Depreciation of the Asset (Lessee)

A

SL

GAAP =
~O & W = Asset Life
~N & S = Lease Life

IFRS:
~ Short of the lease term and the useful life of the asset

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27
Q

Lessor Accounting = Recording the Sales Type and Direct Financing Lease

Gross Investment
Net Investment
Unearned Interest Revenue

A

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

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28
Q

Lessor Accounting Sales Type Lease COGS

A

COGS
Cost of Asset
- PV unguaranteed residual value (what you get back)
= COGS

N/A to Direct Financing

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29
Q

Lessor J/E to record the sales-type lease:

A 
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
Q

Lessor J/E to record direct financing l

A

DR: Lease payments receivable (gross investment)
CR: Unearned Int Rev (contra-lease receiv)
CR: Asset

31
Q

Excess Profit on Sale-Leaseback for

Operating Lease

Capital Lease

A 
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
Q

Sale Lease Back Deferred Gain (Substantially All Rights Retained = greater than 90%)

~Gain
~Loss(NBV > FV) (real economic losses)
~Other Losses (artificial loss)

A

~Defer all
(amort over leaseback)

~Recognize Immediately

~Defer all
(amort over leaseback)

33
Q

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)

A

~Defer
(up to PV of leaseback)
(amort over leaseback)

~Recognize Immediately

~Defer all
(amort over leaseback)

34
Q

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)

A

~No Deferral

~Recognize Immediately

~Recognize Immediately

35
Q

IFRS- Sale Leaseback

A

~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
Q

Sublease Classification by Original Lessee and Sublessee :

A

O/W = Captial Lease / N/S = Operating Lease

37
Q

Bonds are usually denominated in

A

$1000s

38
Q

How is the price quoted for bonds

A

100s (% of par value)

39
Q

What is an indenture?

A

is a contract for purchase of bond

40
Q

What is coupon rate?

A

the stated interest rate on the bond

41
Q

Bond Interest (Check amt)

A

=Coupon Rate X Face (Bonds generally pay int semi-annually in the US and annually in other countries

42
Q

What is the principal payoff on a bond?

A

is always the full face amount

43
Q

What is a premium/discount on a bond?

A

is the result of the buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest

44
Q

How to calculate Bonds Issued at Par

A

(Stated Rate = Market Rate)
~Principal = PV of $1 x Face (full)
~Interest = Annuity of $1 x payment

45
Q

Bonds Issued at Par (Stated Rate = Market Rate)

Borrower J/E?
Investor J/E?

A

Borrower:
DR: Cash
CR: Bond Payable

Investor
DR: Investment in Bonds
CR: Cash

46
Q

Bonds Issued at a Discount (Stated Rate < Market Rate)

Borrower J/E?
Investor J/E?

A

Borrower
DR: Cash
DR: Discount on Bonds Payable
CR: Bond Payable

Investor
DR: Investment in Bonds
CR: Cash

47
Q

Bonds issued at a Premium (Stated rate > Market Rate)

Borrower J/E?
Investor J/E?

A

Borrower
Dr: Cash
CR: Prem on Bonds Payable
CR: Bonds Payable

Investor
DR: Investment in Bonds
CR: Cash

48
Q

What is the CV formula for a bond?

A

Face
+/- Unamortized prem/disc
= CV

49
Q

What are Bond Issue Cost?

J/E?

IFRS treatment of bond issue cost?

A

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
Q

How to calculate SL Amort of Disc or Prem

A

(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
Q

What is the layout of amortization table

A

Date

Net Carrying Value

SL Amortization
Face X Coupon (B/S - J/E impact)

Paid + Discount
- Premium (I/S - J/E impact)

52
Q

J/E for SL amortization (Borrower)

At Issue date

Interest Expense

A

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
Q

J/E for SL amortization (Investor)

At Issue date

Interest Expense

A

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
Q

Amortization Table for Effective Interest Method of Bonds

A

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
Q

J/E For Effective Rate Bonds
(Borrower)

Issue?

Interest Expense?

A 
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
Q

J/E For Effective Rate Bonds
(Investor)

Issue?

Interest Expense?

A

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
Q

J/E for bonds issued b/n Interest Rates

J/E for First Interest Payment

A

~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
Q

Year-End Bond Interest Accrual
~ J/E to record int accrual
~J/E to record discount amort

A

~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
Q

Bond Sinking Fund Classification

Bond Maturity Value Formula

A

~generally non current (future value of an annuity or ord annuity)

~Bond Maturity Value = Periodic payments X Future value of an annuity

60
Q

J/E to record the sinking fund

J/E to record the first semi-annual interest payment to the fund

A

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
Q

Convertible Bonds

GAAP and IFRS?

A

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
Q

2 Methods for convertible bonds

A

Book Value method (GAAP)

Market Value Method (not GAAP- but tested)

63
Q

Book Value Method:

A

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
Q

J/E for Borrower of Book Value method of Convertible Bonds

J/E for Book Value Method when they are converted

A

~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
Q

J/E for Borrower of Mkt Value method of Convertible Bonds

J/E for Mkt Value Method when they are converted

A

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
Q

Bonds with detachable warrants

A

~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
Q

Bonds with detachable Warrants J/E of issuance

A

~Issuance J/E
DR: Cash
CR: Bond Payable
CR: APIC Warrants

68
Q

What are the…

warrants only method:

Market value method:

A

~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
Q

J/E for Exercise of Detachable Warrants

A

~Exercise Detachable warrants: (No bond impact)

DR: Cash
DR: APIC –Warrants (Reverse)
CR: CS (at par)
CR: APIC

70
Q

Gain/Loss on Bond Extinguishment before maturity

A

~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
Q

Calculation of the G/L on bond extinguishment

Reacquisition Price

Carrying Value

A

(Gain) or Loss = Re acquisition Price - NCV

Face X % paid

=Face - unamort dis + unamort prem - unamort issue cost = CV

72
Q

G/L on bond extinguishment

J/E for Loss
J/E for Gain

A 
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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