F6 Flashcards
Criteria for finance lease
- 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
OWNES for lease accounting and PC
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
PC rules for lessor
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
Accounting for term between sign date and date of commencement
There is no journal entry, only a footnote
How does a sale leaseback qualify as a sale
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
Lessee operating lease journal entries
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
Lessee finance lease journal entries
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
Lessor accounting for sales type lease
Dr. Lease receivable
Dr. Loss if loss
Cr. Fixed asset - remove
Cr. Gain if gain
Lessor Direct Financing lease with PC
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
Lessor Operating lease
Dr. Cash
Cr. Rental income
Dr. Depreciation expense
Cr. Accumulated depreciation
Income statement presentation
Operating will only have lease expense
Finance will have interest expense and depreciation
Cash Flows
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
What is a derivative instrument?
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
Underlying definition
A specified rate or value like an interest rate or foreign exchange rate
Notional amount definition
Specified unit of measure like currency or shares
Value or settlement amount
Is the notional amount multiplied by the underlying
Payment provision
Specified or determinable settlement that is to be made of the underlying behaves a certain way
Hedging definition
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.
Option contract definition
Contract between 2 parties that gives one party the right, but not the obligation to buy or sell something at specific price.
Futures contract definition
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
Forward contract
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
Swap contract
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
Derivative risks
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
No hedge designation
Changes in FV reported in earnings
Fair value hedge accounting
Changes in FV from hedged item included in current earnings to offset gain or loss
Cash flow hedge
Effective portion: included in other comprehensive income until hedged transaction effects earnings
Ineffective portion: included in earnings
Foreign exchange hedge
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
Qualified derivatives can be used to hedge cash flows associated with what?
Assets, liabilities, and forecasted transactions; but not firm commitments
Put option
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
Monetary items
Assets and liabilities denominated in dollars like payables and receivables
Nonmonetary items
Shit that fluctuates in value like PP&E, inventory, and stocks
Remeasurement
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
Translation
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
What is intraperiod tax allocation?
Allocation that occurs within the current income statement
How is intraperiod tax allocated?
“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
Interperiod allocation
Owe now + owe later = expense on income statement
Dr. Tax expense
Cr. Owe now liability
Cr. Owe later liability
Examples of permanent differences
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
Base formula to back into taxable amount
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
Financial statement income first and tax return income later
Tax income later = future tax liability
Instalment sales
Contractor accounting % of completion
Equity method income
Tax return income first and financial statement income later
Tax income first = prepaid tax benefit (asset)
Prepaids
Financial statement expense first and tax return expense later
Tax deduct later = future tax benefit (asset)
Bad debt expense
Estimated liability/warranty expense
Start up expenses
Tax return expense first and financial statement expense later
Tax deduct first = future tax liability
Depreciation and amortization
Cash basis prepaid
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
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
Journal entry for taking an aggressive tax position and it not working
Tax expense in increased
Dr. Tax expense
Cr. Other liabilities
Tax journal entry when you have a stated income and a temporary difference
- 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
Carrybacks and forwards
- 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
Dividend received deduction exclusion rates
Ownership 0-19% - 50% exclusion
Ownership 20-80% - 65% exclusion
Ownership Over 80% - 100% exclusion
Dividend received deduction rules
- 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
How to classify temporary differences that decrease & increase taxable income
If they decrease taxable income then they are a noncurrent asset & if they increase taxable income then they are considered noncurrent liabilities
Over what period do you amortize and finance lease when lessee takes ownership at the end
The economic life, not the term of the lease since title is being transferred when the lease term ends
What value to depreciate when you are in a finance lease and you are expected to exercise the purchase option.
Don’t include the purchase option in the depreciable base, just deduct any salvage value
When there is guaranteed residual value
You multiply it by PV factor and add to value of lease liability
How to determine if answer in tax question is an asset or a liability
It is a liability when financial statement income is greater than tax and an asset when financial statement income is less
