F5

Question 1

With operating leases, are lessees allowed to capitalize leasehold improvements?

Answer 1

Yes, it’s permanently affixed to the property and reverts back to the lessor at the end. Lessees should capitalize to the balance sheet and depreciate over the lesser of lease life and the improvement asset life.

Question 2

Is rent kicker paid (premium rent payment required for specific events) allocated over the whole lease period?How about rent free/ reduced rent considerations(unequal amounts through lease term)?

Answer 2

Matching principle. Rent kicker is period expense. Free rent is like a discount of total rent, lesee should allocate the total rent over the whole period.

Question 3

How is refundable and nonrefundable deposits recorded by lesee? Operating lease.

Answer 3

Both are Assets to lesee until lessor consider the deposit earned. Refundable–Receivables.
Nonrefundable–prepaid rent expense.

Question 4

How is refundable and nonrefundable deposits recorded by lessor? Operating lease.

Answer 4

Liability until earned (typically at end of lease, so no amortization).
Nonrefundable–unearned revenue.
Refundable–refundable deposits.

Question 5

How is lease bonus treated by lessor and lessee? operating.

Answer 5

Lessor– unearned income, amortized into income over life of lease.
Lessee–deferred charge(asset), amortized over life of lease.

Question 6

Capital lease criteria under GAAP (lessee)?

Answer 6

one of the four: Ownership transfer at end; Written bargin purchase option; Ninety percent (PV of lease payment >= 90% FV of asset); Seventy five % or more economic life is being committed in lease term.

Question 7

Sale type/ direct finance lease criteria under GAAP (lessor)?

Answer 7

All three: Lessee owns the asset (one of OWNS is met); Uncertainty regarding unreimbursable cost to lessor does not exist; Collectability of lease payment is reasonably predictable.

Question 8

When calculating the present value of lease payment for recording asset and liability by lessee, which interest to use?

Answer 8

The lesser of lease interest rate and lessee’s incremental borrowing rate.

Question 9

What’s the depreciation period of an asset under capital lease?

Answer 9

OW–asset life. NS–lease life. practically the same for GAAP and IFRS.

Question 10

What’s the amount of sales revenue to the lessor under sale-type lease? amount of lease receivable?

Answer 10

Sales revenue–The present value of (lease payment+guaranteed residual), does not include unguaranteed residual(due to conservatism, notice diff. with “net investment”).
Lease receivable– Gross investment( lease payment+unguaranteed residual)
Difference between the two is “unearned interest income)(contra lease receivable)

Question 11

With a sale-type lease, what amount goes into I/S at time of sale?

Answer 11

Total Sales revenue and total cost of goods sold. Future interest income Cr’d in balance sheet under “unearned interest income”, a contra-lease receivable account. Net receivable is the carrying amount of the lease. As payments come in, the interest part gets Dr’d to “unearned interest income” Cr’d to income, total payment Cr’d to “lease receivable”, essentially net of the two is the decease of lease carrying amount(principle).

Question 12

What’s the genreral rule of G/L recognition for sale-lease back transaction for seller/lessee, under GAAP?

Answer 12

Lease back between 10% to 90%, treat as single financing transaction– part of the profit of sale that’s going back to buyer (PV of lease payment) is deferred and amortized. Excess gain is rec’d. Real loss(FV lower than NBV) rec’d immediately. Artificial loss(sale price lower than FV) is deferred and amortized over leaseback period.

Question 13

What is the amount of asset and liability from a capital lease for lessee?

Answer 13

The lesser of FV of asset or cost (FV of minimum lease payment). Minimum lease payment includes required payment, bargin purchase option and guaranteed residual value.

Question 14

What’s the genreral rule of G/L recognition for sale-lease back transaction for seller/lessee, under IFRS?

Answer 14

If the lease back is a finance lease– all profit is deferred and amortized over term of lease.
If the lease back is a operating lease– profit or loss are rec’d, if sale price is at fair value.

Question 15

Is a sublease of a capital lease considered capital or operating?

Answer 15

If meets O or W–ownership transfers at end, capital. Otherwise operating.

Question 16

At issuance, what’s the Cr’d bond payable account amount?

Answer 16

Always face value. It’s not the carrying value of the bond. Carrying value= bond payable +/- unamortized premium/discount.

Question 17

How does unamortized discount or premium affect the net carrying value of the long-term liability?

Answer 17

Unamortized discount subtract from bond payable is the net. Unamortized premium Plus bond payable is the net carrying value of the bond. Eventually, unamortized discount decrease (amortize) to 0,carrying value=face. unamortized premium decrease to 0, carrying value=face.

Question 18

Are bond issue costs expensed or capitalized and amortized over bond life? GAAP, IFRS?

Answer 18

GAAP: Capitalized as a deferred charge (bond issue cost-asset) and amortized (straight line) into bond issure expense.
IFRS: Factored into the discount(+) and amortized together using effective rate method.

Question 19

What method is required under GAAP and IFRS for amortization of bond premium or discount?

Answer 19

Effective rate method. Interest expense= bond net carrying value * effective rate. amortization amount(B/S)= interest expense(I/S)-coupon paid(B/S). In essense, $ changes every period but interest rate is constant.

Question 20

Bond premium/discount amortization speed straight line vs effective rate? Bonds outstanding method for serial bonds?

Answer 20

Effective rate slower at first, goes faster towards end. Bonds outstanding method goes faster at begining（due to higher balance).

Question 21

When the buyer buys bonds between coupon payment dates, how to account for the interest for period not held?

Answer 21

At purchase, buyer needs to pay the accrued interest that doesn’t belong to him, and at coupon date, still get the full coupon payment. Seller record the extra payment by crediting “interest expense”, which will be reversed at coupon payment.

Question 22

When is bond interest recorded?

Answer 22

At payment date, but if payment date do not agree with year end date. Part of it needs to be accrued at year end. Cr interest payable instead of Cash.

Question 23

How is the convertable feature valued at bond issurance? GAAP vs IFRS?

Answer 23

GAAP–Not valued, all proceeds goes to bond itself.
IFRS–Bond valued at fair value, the difference is assigned to the convertable feature as a component of equity(just like detachable warrants under GAAP).

Question 24

How is the conversion of bond recorded under GAAP?

Answer 24

Book value method– no G/L rec’d. All bond acount written off(paid/amortized to date), squeeze excess over common stock (Par) into APIC

Question 25

Under which account is detachable warrants recorded? what amount?

Answer 25

APIC-warrants. If only warrants FV known, record at FV, the difference is recorded to bond discount or premium. If both warrants and bond FV are known, allocate total amount received between warrant and Bond pro rata.

Question 26

How to determine if a retirement of bond results a gain or loss?

Answer 26

Compare reaquisition price with carrying amount, not market value.