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FAR Review > F6 > Flashcards

F6 Flashcards

1
Q

What are leasehold improvements?

A

Categorized under operating leases, these are things permanently attached to the land, NOT EASILY REMOVED. Capitalize the value and added to PPE section. Also depreciate the asset over the lower of the lease term or asset useful life

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2
Q

What is a lease bonus? (both p)

A

Lessee:
prepaid asset - where you prepay a portion of the lease and amortize the amount over the term of the lease
Basically, lessee pays a portion of the lease early so that the lessor gets more money up front.

Lessor:
Since lessee prepaid, its liability - unearned revenue for the lessor and still amortized over lease term.

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3
Q

What is a rent kicker? both p

A

Lessee:
EXPENSE - A premium paid on top of the original lease,

Lessor:
Revenue -

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4
Q

What is a REFUNDABLE security deposit? both p

A

Lessee:
ASSET (RECEIVABLE) - Lessee paid and is recognized as a receivable until the lessor actually pays it back

Lessor:
Liability - money that still needs to be paid back to lessee

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5
Q

What is a NON-REFUNDABLE security deposit? both p

A

Lessee:
ASSET (PRE-PAID) - Remains prepaid until the lessor determines its been earned

Lessor:
Liability (Unearned Revenue) - Not recognized until the deposit is earned by the lessee

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6
Q

How to deal with problems with free/reduced rent offered at beginning of term?

A

Removing the amount of free rent, still need to recognize total monthly rent and accrue that amount. For the free period recognize the expense for the discounted amount, and then back to normal after that period expires.

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7
Q

Rule for capitalizing leases?

A

AS LONG AS MEET 1 of 4 CRITERIA

1) Ownership transfers at end of lease
2) Written option for bargain purchase, means lessee can purchase leased property at end of term for less than FMV
3) Lease term greater than or equal to 75% of the total economic life
4) PV of lease payments is greater than or equal to 90% of FV of property

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8
Q

Lease Capitalization Rules (LESSEE Perspective)

A

1) Use 4 criteria to determine if lease qualifies as capital lease
2) Find the PV of the minimum lease payments (plus any BPO or guaranteed residual value) and compare to FV of asset, record the lower of the 2 as the initial lease value
Lease XX
Obligation XX
3) Record first payment in full (annuity due)
Obligation XX
Cash XX
4) Record interest expense
Interest Expense XX
Interest Payable XX
5) Record Depreciation
Depreciation Expense XX
Accumulated Depreciation XX
6) Interest Payable XX
Obligation XX
Cash XX

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9
Q

Requirements for capital lease (lessor perspective)

A

1) Needs to be capital lease under lessee perspective
2) No cost uncertainties
3) Collectability is reasonably predictable

**If all 3 requirements met, pretend its sale on credit and stop recording depreciation

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10
Q

Record sales-type lease (lessor perspective)

A

2 JOURNAL ENTRIES
1) Record overall lease value and unearned interest income
Lease payments receivable XX
Unearned Interest Income XX
Sales Revenue XX
2) Record equipment cost
COGS XX
Inventory XX

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11
Q

Record direct financing lease (lessor perspective)

A

Only record first journal entry, but decreasing asset instead of sales revenue, nothing actually bought/sold/exchanged because treating it just like a loan!!

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12
Q

What is a direct financing lease?

A

Where selling price of equipment is equal to the cost

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13
Q

Lessee Capitalization

A

Record leased asset at lesser of FV of asset or PV of minimum lease payments (includes any BPO or guaranteed residual value) —– EXCLUDE executory costs
Discount rate - use lower of implicit rate or borrowing rate

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14
Q

What is the FV of a lease equal to?

A

The PV of the future cash flows!!!

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15
Q

what does it mean when it says “capital lease obligation NET OF CURRENT PORTION?”

A

NET means add that part to the original capital lease obligation

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16
Q

What are executory costs and how are they treated?

A

INCLUDE: insurance, taxes, and repairs and maintenance —–> these costs should be SUBTRACTED from when calculating the lease obligation value (AKA. the PV of minimum lease payments)
Executory costs - these are expensed when paid

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17
Q

Lease DEPRECIATION RULES

A

When there is BPO or title transfer option, lease is depreciated over ASSET LIFE. When there is no transferring of ownership options, use LEASE TERM!!!

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18
Q

Lease capitalization UNDER IFRS!

A

Add costs when calculating the PV of the asset/obligation

19
Q

Relationship between PV total payments, total interest income and original lease liability`

A

Total CF from lease payments - Total CF from PV pmts = TOTAL INTEREST INCOME

20
Q

Sales-Leaseback RULES

A

1) If PV min lease payments < 10%, recognize all gain immediately (SP - CV), losses, artificial losses and defer nothing
2) If PV min lease payments >90%, defer all gain, recognize losses immediately, and defer artificial losses
3) If PV min lease payments >10% but <90%, defer gain up to PV min lease payments then recognize rest, losses recognized immediately and artificial losses deferred

21
Q

IFRS Sales leaseback rules

A

1) If lessee OWNS it - defer all gain
2) if lessee doesn’t OWNS it - recognize gain
- if SP = FV, recognize NOW
- If SP > FV, defer all gain
- If SP < FV, recognize loss NOW

22
Q

TO REMEMBER FOR WHEN WRITING JE FOR OPERATING LEASES!!!!!

A 
RECORDING:
NO depreciation
NO interest
NO asset
NO liability

Just rent expense

23
Q

amortization deferred gain - salesback leases

A

Capital lease = over asset life

operating lease = over lease term

24
Q

Journal entries lease back - operating lease

A

1) Record the lease
Cash XX
Asset XX
Unearned (deferred) gain XX
Earned gain XX
2) Record rent payment
Rent Expense XX
Cash XX
3) Amortization of lease
Unearned gain XX
Earned Gain XX

25
Q

Journal entries lease back - capital lease

A

1) Same as operating lease (to record initial lease)
2) Record lease payment
Lease obligation XX
Cash XX
3) Accrual of interest
Interest Expense XX
Interest payable XX
4) Record Depreciation
Dep Expense XX
Accumulated Dep XX
5)

26
Q

Rules of amortization of gains (Capital + Operating)

A

For both, NEED TO RECOGNIZE EVERY YEAR, if OWNS = over asset life, if not OWNS = lease life, for operating leases its classified as rent expense, for capital leases it decreases the lease value

27
Q

Rule for options and futures

A

Anytime on buy side (call, long), make money when prices go down
Anytime on sell (put, long position), make money when prices go up

28
Q

Difference between long hedge vs short hedge

A

Long hedge - buy forward or futures contract to protect against cost of what you are buying to go up, profit made from futures will offset higher cost

Short hedge - Offset risk that value of asset you are SELLING in future will go down in value, can SELL forward/futures contract (you make money from this when prices go down, so can offset).

29
Q

To solve for buying/selling futures forwards

A

1) Figure out underlying + hedging loss/gain
2) When actually execute, find loss and gain for each, and remove what was already previously recognized
3) Record what you are actually buying/selling

30
Q

How to find gain/loss on forward contract

A

Compare the forward rate at the original date and future date!

31
Q

What is the notional amount?

A

the number of shares of stock

32
Q

What is the underlying?

A

the price per share

33
Q

What is a perfect hedge?

A

No possibility of future loss OR gain

34
Q

How to record derivatives held for speculative purposes?

A

These derivatives are always recorded to reflect changes in fair value. These are accounted for in Net Income

35
Q

what are marketable equity securities reported at?

A

Fair value using current exchange rates

36
Q

Foreign subsidiary of US entity measures assets/liabilities at what?

A

FUNCTIONAL CURRENCY

37
Q

What approach is used to determine income taxes under GAAP?

A

Asset and Liability approaches

38
Q

Excess depreciation is what

A

DEFERRED TAX LIABILITY, there is less depreciation recorded for tax purposes than for F/S, so you will need to pay more in the future

39
Q

How to solve for effective tax rate?

A

Total tax owed in current year/Total Income = Effective tax rate

40
Q

Warranty expenses (tax effect)

A

Create a deferred tax asset, future tax deductions that result

41
Q

prepaid Rent is DTA

A

Yes, because in present day you are prepaying rent, so your taxable income will be higher upfront and you will pay less when you actually receive the rent.

42
Q

How to account for the reduction due to dividends?

A

if own 0-19% (exclude 70%), own 20-80% (exclude 80%), own greater than 80% (exclude 100%).

43
Q

REMEMBER dividend income is the taxable income

A

use to figure out how much dividend income excluded from taxes.

FAR Review (2 decks)

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