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Becker - FAR > F6 > Flashcards

F6 Flashcards

1
Q

Criteria for finance lease

A
  • The lease agreement transfers ownership of the leased asset to the lessee at the end
  • Bargain purchase option (BPO).
  • Lease is 75% or more of useful life of leases asset
  • Minimum lease payments are 90% of the FV
  • No alternate use
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2
Q

OWNES for lease accounting and PC

A 
O - ownership transfer
W - written(bargain option)
N - Net Present - 90%
E - Economic life - 75%
S - Specialized

P - lessee guaranteed residual value not included in lease payments, 3rd party guaranteed residual

C- lease payments necessary to satisfy residual is probable

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3
Q

PC rules for lessor

A

If both are met then it is a direct finance lease but if only one is met then it is an operating lease and OWNES makes it a sales type lease

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4
Q

Accounting for term between sign date and date of commencement

A

There is no journal entry, only a footnote

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5
Q

How does a sale leaseback qualify as a sale

A

The lease has to an operating lease and you can report a gain, but if it is a finance lease then it is a failed sale

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6
Q

Lessee operating lease journal entries

A

Initial entry
Dr. Asset - (minimum payment x annuity)
Cr. Lease liability

Subsequent entries
Dr. Lease exp - annual payment
Cr. Lease liability - Lease expense minus [PV of payments times interest rate]
Dr. Cash
Cr. Accumulated depreciation
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7
Q

Lessee finance lease journal entries

A

Initial entry
Dr. Asset - (minimum payment x annuity)
Cr. Lease liability

Subsequent entries
Dr Interest expense
Dr. Lease liability
Cr. Cash/lease payable

Dr. Amortization
Cr. Accumulated depreciation

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8
Q

Lessor accounting for sales type lease

A

Dr. Lease receivable
Dr. Loss if loss
Cr. Fixed asset - remove
Cr. Gain if gain

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9
Q

Lessor Direct Financing lease with PC

A

Dr. Lease receivable
Dr. Residual asset - pv of asset when you get it back
Cr. Fixed asset - removing asset

Initial costs - payments
Dr. Cash
Cr. Interest Income
Cr. lease receivable

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10
Q

Lessor Operating lease

A

Dr. Cash
Cr. Rental income

Dr. Depreciation expense
Cr. Accumulated depreciation

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11
Q

Income statement presentation

A

Operating will only have lease expense

Finance will have interest expense and depreciation

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12
Q

Cash Flows

A

Operating - lease payments for operating and any payments to bring asset to condition is investing

Finance leases the interest payments go to operating and the principal payments go to financing

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13
Q

What is a derivative instrument?

A

Financial instrument that derives its value from some other instrument that has the following characteristics

  • one or more underlyings and one or more notional amounts or payment provisions
  • requires no initial investment or one that is smaller than would be required for other types of similar contracts
  • terms require or permit settlement or can readily be settled outside contract or by delivery on asset that gives same results
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14
Q

Underlying definition

A

A specified rate or value like an interest rate or foreign exchange rate

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15
Q

Notional amount definition

A

Specified unit of measure like currency or shares

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16
Q

Value or settlement amount

A

Is the notional amount multiplied by the underlying

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17
Q

Payment provision

A

Specified or determinable settlement that is to be made of the underlying behaves a certain way

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18
Q

Hedging definition

A

The use of derivative to offset anticipated losses. When it is effective change in value of derivative offsets the change in value of the hedged item or cash flows of hedged item.

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19
Q

Option contract definition

A

Contract between 2 parties that gives one party the right, but not the obligation to buy or sell something at specific price.

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20
Q

Futures contract definition

A

Agreement between 2 parties to exchange shit at a future date. One party takes long position which means to buy and the other party takes the short position which means to sell. Done through a clearinghouse and have standardized notional amounts and settlement dates

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21
Q

Forward contract

A

Same as a futures contract but is privately negotiated with an intermediary instead of a clearinghouse and do not have standardized notional amounts or settlement dates

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22
Q

Swap contract

A

Private agreement between 2 parties to exchange future cash payments like interest rate swaps and currency rate swaps. Equivalent to a series of forward contracts

23
Q

Derivative risks

A

Market risk: risk entity will incur a loss on a derivative contract

Credit risk: risk that other party in the contract will not perform according to the terms of the contract

24
Q

No hedge designation

A

Changes in FV reported in earnings

25
Q

Fair value hedge accounting

A

Changes in FV from hedged item included in current earnings to offset gain or loss

26
Q

Cash flow hedge

A

Effective portion: included in other comprehensive income until hedged transaction effects earnings

Ineffective portion: included in earnings

27
Q

Foreign exchange hedge

A

FV hedge: included in current earnings

Cash flow hedge: effective is in comprehensive income and ineffective is in earnings

Net investment hedge: included in other comprehensive income and cumulative translation adjustment

28
Q

Qualified derivatives can be used to hedge cash flows associated with what?

A

Assets, liabilities, and forecasted transactions; but not firm commitments

29
Q

Put option

A

If there is a strike price(locked price) the buyer would purchase the put option if he thinks the market price will drop so that the seller would have to buy back the stock at the strike price

30
Q

Monetary items

A

Assets and liabilities denominated in dollars like payables and receivables

31
Q

Nonmonetary items

A

Shit that fluctuates in value like PP&E, inventory, and stocks

32
Q

Remeasurement

A

The foreign subsidiary’s functional currency is the reporting currency of the parent and the subsidiary is dependent on the parent

Balance Sheet: monetary items use current rate and nonmentary use historical

Income Statement: non-balance sheet items use weighted average and balance sheet items like COGS and depreciation use historical rate

Remeasurement gains and losses are reported on the income statement

33
Q

Translation

A

Subsidiary’s currency is its functional currency and it is independent of its parent

Income statement: weighted average

Balance sheet: assets and liabilities uses current rate, common stock uses historical, and retained earnings is a rollforward

Translation gain or loss is reported in comprehensive income

34
Q

What is intraperiod tax allocation?

A

Allocation that occurs within the current income statement

35
Q

How is intraperiod tax allocated?

A

“Income Statement Items”
Income from continuing operations
Discontinued operations
Accounting principle change(retrospective

"Other Comprehensive Income Items"
Pension funded status
Unrealized gain or loss available for sale debt security
Foreign translation adjustment
Instrument specific credit risk
Effective portion of cash flow hedge
36
Q

Interperiod allocation

A

Owe now + owe later = expense on income statement

Dr. Tax expense
Cr. Owe now liability
Cr. Owe later liability

37
Q

Examples of permanent differences

A

Tax exempt interest from tax or state
Life insurance proceeds on officer’s key man policy
Life insurance premiums when corporation is the beneficiary
Certain penalties, bribes, fines, kickbacks, etc.
Nondeductible portion of meal and entertainment expense
Dividend-received deductions
Excess percentage depletion over cost depletion

38
Q

Base formula to back into taxable amount

A

Income: $160,000
Municipal interest: $50,000
(Life insurance premium expense): ($10,000)
Pretax Financial Income: $200,000

$160,000 multiplied by tax rate equals income tax expense

Dr. income tax expense
Cr. income tax payable

39
Q

Financial statement income first and tax return income later

A

Tax income later = future tax liability

Instalment sales
Contractor accounting % of completion
Equity method income

40
Q

Tax return income first and financial statement income later

A

Tax income first = prepaid tax benefit (asset)

Prepaids

41
Q

Financial statement expense first and tax return expense later

A

Tax deduct later = future tax benefit (asset)

Bad debt expense
Estimated liability/warranty expense
Start up expenses

42
Q

Tax return expense first and financial statement expense later

A

Tax deduct first = future tax liability

Depreciation and amortization
Cash basis prepaid

43
Q

Add increase in deferred tax liability and deduct decrease in deferred tax liability

Deduct increase in deferred tax asset in add decrease in deferred tax asset

A

Add increase in deferred tax liability and deduct decrease in deferred tax liability

Deduct increase in deferred tax asset in add decrease in deferred tax asset

44
Q

Journal entry for taking an aggressive tax position and it not working

A

Tax expense in increased

Dr. Tax expense
Cr. Other liabilities

45
Q

Tax journal entry when you have a stated income and a temporary difference

A
  • back into taxable income and multiply by that year’s rate
  • multiply difference by enacted rate for future years

Dr. Current income tax expense - 1st step
Dr. Deferred income tax expense - 2nd step
Cr. Deferred tax liability - 2nd
Cr. Income tax payable - 1st

46
Q

Carrybacks and forwards

A
  • Carrybacks only go back 5 years 2018,2019,2019
  • they offset the income from prior years and multiply the carried back amount by the enacted rate
    Dr. Tax refund receivable
    Cr. Tax benefit
  • any remainder is a carry forward and you multiply by enacted rate
    Dr. Deferred tax asset
    Cr. Tax benefit
  • also income in the next year reduces the carry forward then multiply by enacted rate to get deferred tax asset valuation allowance
    Dr. Tax refund receivable
    Dr. Deferred tax asset
    Cr. Deferred tax asset valuation allowance
    Cr. Tax benefit
47
Q

Dividend received deduction exclusion rates

A

Ownership 0-19% - 50% exclusion
Ownership 20-80% - 65% exclusion
Ownership Over 80% - 100% exclusion

48
Q

Dividend received deduction rules

A
  • Dividends received is what is taxable
  • The difference between equity method and dividends is multiplied by 1 minus exclusion rate and you multiply that by enacted rate to get deferred income tax expense
  • taxable income is dividends received multiplied by exclusion rate and you multiply that by enacted rate to get current income tax expense
49
Q

How to classify temporary differences that decrease & increase taxable income

A

If they decrease taxable income then they are a noncurrent asset & if they increase taxable income then they are considered noncurrent liabilities

50
Q

Over what period do you amortize and finance lease when lessee takes ownership at the end

A

The economic life, not the term of the lease since title is being transferred when the lease term ends

51
Q

What value to depreciate when you are in a finance lease and you are expected to exercise the purchase option.

A

Don’t include the purchase option in the depreciable base, just deduct any salvage value

52
Q

When there is guaranteed residual value

A

You multiply it by PV factor and add to value of lease liability

53
Q

How to determine if answer in tax question is an asset or a liability

A

It is a liability when financial statement income is greater than tax and an asset when financial statement income is less

Becker - FAR (10 decks)

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