F5: Leases, Liablites, and Bonds

Question 1

For a operating lease what should the leasehold improvement be deprecated over for a lessee?
How does the Lessor depreciate the asset?

Answer 1

It should be depreciated over the lesser of the useful life of the improvement or the lease life.
The lessor depreciates the asset over its useful life

Question 2

What is the Lesse’s criteria for categorizing a lease as a capital lease under IFRS?

Answer 2

OWESFACS
Ownership
Written bargain purchase option
Economic life is a major part of the lease term.
Substantially all of the fair value of the PV of lease payments.
Fluctuation of the fair value results in gains and losses that go to the lessee
Ability to continue the lease
Cancel the agreement any time the lessee can
Specialized nature that only the lessee can use the them without modification.

Question 3

Under a Capital Lease what do you depreciate the asset over?

Answer 3

You will depreciate it over the useful life if you are either going to have the ownership transferred to you or a bargain purchase option.
If you are just owning it for more than 75% of its useful life or that you are paying over 90% of the PV of the FV payments then you are going to do it over the lease term.

Question 4

Under IFRS what is the period of benefit of a useful life under a finance type of lease?

Answer 4

It is going to be the shorter of the useful life or the lease term.

Question 5

What should happen to the guaranteed residual value when it comes to a capital lease

Answer 5

The guaranteed residual should be included as a part of a minimum lease payments at present value. Not future value.
The same is true for bargain purchase options.

Question 6

How do you calculate the profit for a sales type lease?

Answer 6

You take the PV of the lease - Carrying amount of the lease.
Usually the PV of the lease can be the selling price, but if the PV is clearly stated then use that number.
You do not take the selling price - the carrying amount to get this.

Question 7

What is the formula for the PV of a lease?

Answer 7

This is the Lease payment x the PV of an annuity.

Question 8

If there is no PV given what can be used as a PV?

Answer 8

The selling price of the equipment or the lease can be used as the PV as well.

Question 9

In a sales type lease what does the lessee record as the value of the equipment on the books?

Answer 9

They record it at the lower of the Fv or the cost (PV of minimum lease payments)
And be careful to look to see if O or W is met if not then it is depreciated over the life of the lease not the asset.

Question 10

What is the rule for deferring income on a sale back lease when it is a capital lease?

Answer 10

The general rule is any gain that you get from a profit of sale on the equipment under a sale leaseback agreement it will be amortized by the depreciation on the leased asset.

Question 11

Under IFRS what are the rules for deferring a gain under a sale leaseback agreement?

Answer 11

If the sale lease back is classified as a operating lease and the fair value matches the selling price then no gain is deferred.
If it is regarded as a finance lease then all the gain should be deferred.
If the lease is regarded as operating lease the only way the gain can be recognized is if sales price is below the fair value.
If its an operating lease and the sales price is above or equal to the fair value then no gain is deferred.

Question 12

How do you determine if the sale leaseback is a minor medium or major portion for revenue deferring purposes?

Answer 12

If it is under 10% of the selling price then no defer gain.

If it does not fall under the 75% life test it will also be considered minor.

Question 13

When dealing with bonds what is the principal timed by (the factor), and how about the periodic interest payments?

Answer 13

The principal is times by the PV of $1. @ the market rate of interest.
The annual or semiannual payments are timed by the P of an annuity. @ the market rate.

Question 14

Whats the journal entry to record a bond issued at par?

For the borrower and the investor?

Answer 14

Investor
Dr: Cash
Cr:      Bond payable (Face amount)
Borrower 
Dr: investment in bonds
Cr:     Cash

Question 15

How do you record a discount on Bonds? When the market rate is greater than the stated or coupon rate

Answer 15

Investor
Dr: Investment in bonds
Cr:     Cash (at the disocunt)
Borrower
Dr: Cash
Dr: Discount on bonds
Cr:     Bonds Payable

Question 16

Whats the JE for a premium?

Answer 16

Borrower:
DR:Cash
CR: Premium on BP
CR: Bond Pay

Question 17

How do you get the interest expense under the effective interest method?

Answer 17

First of all this method is required under U.S GAAP and required by IFRS.
This method will give I/S and B/S impacts.
I/S = interest expense = Net carrying value x effective interest rate
B/S = Face x coupon rate = interest paid.
The difference between these two is the amortization.

Question 18

What is the factor that is used for the periodic payments to a sinking fund?

Answer 18

This is going to use the factor of a future value of an annuity of 1

Question 19

What is the difference between a warrants only method and the market value method?

Answer 19

You use the warrants only method when you only know the FV of the warrant and not the bond.
You use the market value method if you know the FV of the bonds and the warrants.

Question 20

How do you account for a detachable warrant?

Answer 20

It is going to be accounted for separately from the actual bond, since it can be redeemed. This is only true for a detachable warrant. It must also have a market value for it to be considered seperate.
Dr: Cash
Cr: Bond payable
Cr: APIC- Warrants

Question 21

How is the bond payable valued?

Answer 21

It is the face value - the amortized discount

It is the face value + the unamortized premium.

Question 22

How do you get the APIC- Warrants?

Answer 22

You take the number of bonds (Face/1000) x # of detachable warrants x FV of warrants.

Question 23

When is a sinking fund considered to be a current asset? What is it normally>

Answer 23

It is considered current if it there to offset a current bond liability.
It is usually a non current asset.

Question 24

Over time what happens to the interest expense as time goes on for discount and premium?

Answer 24

The discounts will result in a higher interest expense over time, and a premium will result in a lower interest expense over time.

Question 25

When the PV is not given how can you also get the profit or loss from a sales type lease?

Answer 25

The present value = selling price = FV

Question 26

When you are considering if a sale leaseback agreement should be deferred or not what are you going to be comparing>=?

Answer 26

First you want to determine if it is a capital or a operating lease. Capital there are deferrals, and operating nothing is deferred, you recognize the gain. (Selling price - NBV) = gain or loss.
Seconldy, you want to compare he sale price/FV with the present value of the lease payments.
You want to times the Sales price by .10, and if the present value of the lease payments is less than this then you consider it minor.
The profit or loss from this agreement is gotten by taking the BV/CV subtracting from the FV/Selling price.
If it is a medium portion you would take the selling price - nbv= profit - PV of min payments = profit recognized.
If its a major portion then you defer all the profit.

Question 27

When should the lessor recognize the income from the non refundable deposit received?

Answer 27

They should recognize it over the life of the lease. As it is earned, not right away.

Question 28

What are the components of a direct financing lease for the lessors account receivable?

Answer 28

The minimum lease payments plus the residual value. Because the lessor is going to expect to collect the residual when the lease is over.

Question 29

If a security deposit is refundable is it included in the expense at year end?

Answer 29

No it would not it would be considered a asset, a deferred one, and would not be expensed, this is only the case if it were not refundable.

Question 30

How do you calculate the monthly rent expense in a rental agreement?

Answer 30

You take the total number of periods in the lease times by the monthly rent.
Then you subtract out the rents that you are giving for free.
Then you take the answer above and divide it by the monthly rental periods to get the monthly rent.

Question 31

When is interest expense recognized in the bonds when it is says for the entire year?

Answer 31

Interest is recognized for the entire year from the date of issuance.

Question 32

How do you come up with the APIC-Warrants under the market value method?

Answer 32

You take the fmv of the bond + FMV of the warrant = Y
then take the selling price of bond x (FMV of bond/Y)
Then take the selling price of bond x (FMV of warrant / Y).
The second one will give you APIC warrants.

Question 33

When you are using the book value method for the conversion of bonds into stock what will be the value of the stock upon conversion?

Answer 33

It will be the carrying value of the bonds on the books (Face + Premium - Discount).
The stock issued is recorded at the carrying value of the bonds.

Question 34

How are debenture bonds valued, and how about serial bonds, when it comes to valuing them based on secured and unsecured liabilities?

Answer 34

Serial - bonds that would be maturing anually, commodity backed bonds maturing annually, and these can be secured or unsecured.
For debenture bonds it would just be the unsecured debt.

Question 35

Under IFRS if there is a transaction that is classified as a finance lease in a sale leaseback transaction what happens to the profit?

Answer 35

Then any profit is deferred and is amortized over the life of the lease.

Question 36

What do you do with accrued interest in terms of adding or subtracting it to the net value of the bond?

Answer 36

If you haven’t accrued it then you would want to include it by adding it.
If you already included it you want to subtract it out.