F5 Flashcards
What is the PV formula?
PV = Future Value X PV factor
How are bargain purchase options accounted for under leases?
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.
What amount of deferred gains are recognized when the sale-leaseback when “substantially all” rights are retained?
Defer all gain and amortize over the leased asset.
How is a Lease Bonus accounted for?
Amortized using the SL method over the life of the asset
Where is guaranteed residual value included in Capital Lease?
An additional lease payment and must be included in the calculation of the PV of the minimum lease payments
What is the criteria for Capitalized life?
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
PV of $1?
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)
Future Value of $1
Future Value of $1 => Compound interest
EX: Bank Savings Account
PV of Ord Annunity
PV of Ord Annuity => Current worth of a series of identical periodic payments
EX: Periodic Lease Payments, Periodic Bond Payments, Winning the Lottery
Future Value of Ord Annuity
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
PV & Future value of annuity due?
PV & Future Value of Annuity Due => Ord → Annuity Due (Timing of Payments
PV of Annuity Due = PV of Ord Annuity + 1
Lessee J/E for Rent Expense
DR: Rent Exp
CR: Cash/Rent payable
How to Treat… (Lessee)
- Lease Bonus
- Leasehold improvements
- Rent Kicker
- Refundable Sec Deposit
- Free or reduced rent consideration
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
Lessor Accounting
For the leased item…
FA = Depreciate over assets useful life
J/e for Lessor Rental Income
DR: Cash/Rent Receivable
CR: Rental Income
Lessor— Treatment of Sec Dep
-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
GAAP - Lessee Capital Lease Criteria (must meet at least 1)
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)
Lessee J/E for capitalized asset
DR: FA - Leased property
CR: Liability - obligation under capital lease
IFRS Capital Lease Criteria
Both lessee and lessor classify a lease as a finance lease if the lease transfers substantially all risks & rewards of ownership to the lessee
GAAP Lessor - Sales Type/Direct Financing Type Criteria (must meet all 3)
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
Profits for Lessors from
- Sales-Type
- Direct Financing
- Gain on sale and Interest income
2. Interest income
Lessee Accounting for Capital(Finance) Lease
J/E
Dr: FA - leased property
CR: Liability - obligation
What to include in the Capitalized amount of the lease for the Lessee?
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
How to calculate the PV of min lease payments=
Periodic Payment = (Beg of period = PV of ann due / End of period = PV of ord ann)
Bargain Pur Option / Guarenteed Residual = PV of $1
What interest rate to use when calculating the PV of min lease payments
Lesser of Rate Implicit or Incremental rate (Market rate)
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
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
Lessor Accounting Sales Type Lease COGS
COGS
Cost of Asset
- PV unguaranteed residual value (what you get back)
= COGS
N/A to Direct Financing
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
Lessor J/E to record direct financing l
DR: Lease payments receivable (gross investment)
CR: Unearned Int Rev (contra-lease receiv)
CR: Asset
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
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)
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)
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
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
Sublease Classification by Original Lessee and Sublessee :
O/W = Captial Lease / N/S = Operating Lease
Bonds are usually denominated in
$1000s
How is the price quoted for bonds
100s (% of par value)
What is an indenture?
is a contract for purchase of bond
What is coupon rate?
the stated interest rate on the bond
Bond Interest (Check amt)
=Coupon Rate X Face (Bonds generally pay int semi-annually in the US and annually in other countries
What is the principal payoff on a bond?
is always the full face amount
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
How to calculate Bonds Issued at Par
(Stated Rate = Market Rate)
~Principal = PV of $1 x Face (full)
~Interest = Annuity of $1 x payment
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
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
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
What is the CV formula for a bond?
Face
+/- Unamortized prem/disc
= CV
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
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
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)
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
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
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
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
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
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
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
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
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)
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
2 Methods for convertible bonds
Book Value method (GAAP)
Market Value Method (not GAAP- but tested)
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
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
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 #)
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
Bonds with detachable Warrants J/E of issuance
~Issuance J/E
DR: Cash
CR: Bond Payable
CR: APIC Warrants
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
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
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
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
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
