F6 Flashcards
Fnancial lease
Ownership transfers to lessee in the end
Written option
Net Present Value Minimum lease/FV of asset>90%
Economic life 75% of life of asset
Specialized unique asset, no alternative use
Failed sale
If underlying lease in sale-leaseback is finance lease it is considering repurchase failed sale
Operating lease JE for Lessee
Total Interest Amount: CV ROU from contract-PV of ROU Asset
- DR ROU Asset (Payments (Annuity)*PV
CR Lease Liability - Payment of interest & ROU Asset Amortization:
DR Lease Expense
CR Cash
DR Lease Liability
CR Accum. Amortization-ROU Asset
Use Amort Schedule (PV ROU Asset*%) minus annual/semiannual payment. Interest getting lower every year, amortization grow, CV -zero in the end of lease.
Total Interest Amount: CV ROU from contract-PV of ROU Asset
JE Operating Lease for Lessor (Owner)
Lessor has no interest income in Operating Lease. Only Rental Income!
Lessor keeps equipment on his balance sheet
- DR Lease Receivable (Annual payment*# of payments)
CR Unearned Lease Rent Income - 1st payment & Asset Depreciation
CR Cash
DR Rental Income
DR Unearned Rental Income
CR Lease Receivable
DR Depreciation Expense
CR Accumulated Depreciation
(CV/Useful life)/2 if every 6 months
What rate to use to calculate PV of lease Payments?
The rate implicit in the lease if known
by lessee /% Rate what lessor expects to return
Calculate total lease consideration
Baseline Payments-Lease Incentive+ Guaranteed Payment
The reduction of the lease liability in Year 2
Should be equal to the current liability shown for a lease for year one (Principal due in year one)
Depreciation by lessee if transfer title
(Lease total - minus salvage value- FV)/asset life. Depreciation can’t be less than salvage value
Calculate lease liability if residual value of asset given
PV of annuity for annual payment +PV of for 1$ for residual value
Sales type finance lease. Calculate profit and interest.
- Profit recognized 1 year. Lease amount (price) - Cost of equipment
- Interest revenue. Lease Price-immediate paymentlease %1/2 year if not full year
Depreciation Expense for Finance Lease with no purchase option
PV of minimum lease payments/ LEASE TERM
If 1st payment due on signing:
Take less years for calculating PV factor and amortization
To recognize asset PV lease payment+1st payment at the date lease was signed
What is the total amount of interest revenue over the life of the lease?
PV/FAIR VALUE of equipment =ANNUAL RENTPV FACTOR
*Annual rent=FV/PV factor
Interest Revenue
INTEREST REVENUE=TOTAL CASH FLOW -LESS PV
ROU Asset
1 Year. DR ROU Asset (PV of lease +initial cost)
CR Lease Liability (PV)
CR Cash paid for initial cost
2 Year. ROU Asset minus depreciation
Lease payment doesn’t reduce ROU, but reduce lease liability
Profit on the sale for lease equipment
Present value of payments minus Carrying Cost of equipment = Profit on Sale
Lessor JE to record Sales Type lease
DR Lease Expense (Initial Cost)
DR Residual Value *PV factor
DR Lease Receivable PV of all lease payments
CR Cash (Initial Cost)
CR Gain (FV-Carrying Value)
CR Equipment
Direct Financial Lease
Present Value + Residual Value=FV Asset
Colectibility Probable
Operating Lease (Income Statement)
One expense: Lease Expense included in income from continuing operations in IS
Finance Lease Lease (Income Statement)
Two Expenses: In Income statement included:
Amortization of ROU asset
Portion of Lease Expense elated to interest on the lease liability
If residual value of leased equipment paid by 3dr party
Don’t include in total amount f lease obligation
Derivatives. No cash outflow except options.
FV hedge-commitment already recognized asset/liability ,e.g. inventory cost changing, buying put to offset loss
FV Hedge goes to IS (Gain/Loss of FV loss).
CF Hedge- to offset variability of future cash flow. Ineffective portion goes to IS, effective portion goes to OCI-Effective portion of hedge
Intrinsic value
Difference between the market price and present strike price at point of time
A gain or loss from forward exchange contract for speculation (doesn’t relate to a specific transaction and opposite hedging) is equal/What amount of foreign currency gain to include in income from this forward contract?
Gain or loss on for future commitment recognized in current income. Difference in forward rate at the date contract was purchased and the forward rate at BS date
If option was not exercised
Must be reported at FV on BS with unrealized gains and loses reported in net income
Settlement amount for option?
Notional amount(how many)*underlying (price or rate)
SWAP derivative fixed rate to variable rate
CF Hedge. OCI
Translation-OCI
Remeasurement -Income Statement
Don’t record any initial JE for derivatives when company takes long/short position
Except options if premium was paid
JE for CF hedge at BS Date (Keep asset at market value). There is no initial JE for Hedge.
DR Cash Flow Hedge
CR OCI
JE CF Hedge at settlement
DR Cash (Net settlement price: Inventory beginning price minus settlement price,gain/loss included)
CR CF HedgeJE CF Hedge when inventory sold
DR AR
CR Sales
DR OCI
CR Gain on CF hedge (reclass to IS from OCI)
Option type -Call (Buy). Underlying 5000 pieces Strike Price-$22 Premium-$3 Option exercised when stock jumped to $30
Benefit if Price goes up:
Profit: 30-22-3=5*5000
Buying a call: You have the right to buy a security at a predetermined price.
Selling a call: You have an obligation to deliver the security at a predetermined price to the option buyer if they exercise the option.
Buying a put: You have the right to sell a security at a predetermined price.
Selling a put: You have an obligation to buy the security at a predetermined price from the option buyer if they exercise the option.
Derivative transaction with no hedge designation. Hold for trading purpose.
Goes to IS, CF Operating
Put option
When Put option “in the money” buyer exercises option, if out of the money-note. Strike exercise price vs market price
Intrinsic value
Difference bw market price and strike price at point of time. If increased:
DR Asset
CR Unrealized gain
Option Contract is Derivative with no hedging option
Must be reported on BS at FV with unrealized gains and losses reported in net income. Option FV=TIme value+(Mkt price-Strike price at point of time)
Long hedge ( manufacturer buy wheat)
You worry that price will go up
Short hedge (farmer) sells wheat
You worry price will go down
If you buy Call or Put option
You buy Asset:
If you sell Call or Put Option
You own Contingent liability
If you buy Call Option
You win, if Price of stock goes up because you can by it for cheaper price and sell for current price paying Premium
If you buy a Put Option
You win, if Price of stock goes down because you can sell it for higher price than market price. You just need to pay premium.
Net investment hedge
Goes to Cumulative translation Adj OCI
CF Hedge effective Portion
OCI
If you sell a call
You give a purchaser a right to buy a stock at fixed amount, you win if stock price goes down because the byer won’t exercise the option
Total loss/gain on selling Option
(Mkt price-strike price)=Total gain/loss
Reduce loss for premium if buyer wins
If Option was not exercised, gain-sum of premium
Swap pay fixed rate get variable rate (cash outflow)
CF hedge
If Derivatives with no hedge designation being held for trading purposes
Net Cash reporting in Operating sections
No Hedge designation derivatives transaction (speculation)
Gain recorded in IS
CF reflected in Investing section
Derivatives
ALL Derivatives measured at FV
Which instrument has the least credit risk
Futures contract as it made through clearing house which guarantees transaction
Remember!
Comprehensive income=Net Income + OCI so changes in FV Hedge and Ineffective Portion of CF Hedge impact Comprehensive Income
If you compare strike price in Put/Call option REMEMBER:
- Find difference strike minus market and only then deduct premium.
Calculate when Customer will gain if strike price $10 per share and premium $2
- Put option at 7$ current mkt price.
Price went down, but customer exercise option to sell for $10. Gain $10-$7=$3-$2=$1 - Call option at $12 mkt price. Customer can buy for $10. Gain $12-$10-$2=$0
- Put option and $13 mkt. Customer won’t exercise right to sell for $10 when he can sell for $13
- Call and $8 mkt. He won’t exercise right to buy for $10 when he can buy it at $8.
FV Hedge
To record loss DR Loss on purchase commitment CR Purchase commitment liability To record the gain: DR FV Hedge CR Gain To record Net settlement: DR Cash CR FV Hedge
DR Purchase Commitment liability
DR Inventory
CR Cash
Under Translation Method translated:
Capital -Historical Rate
All IS accounts-Weighted avg
BS-Year end spot
Under Translation Method translated:
Income from continuing operations, at gross amount
Capital -Historical Rate
All IS accounts-Weighted Avg
BS-Year end spot
Remeasurement currency rates
BS- monetary (AR, Long Term debt)-Spot year end
BS-nonmonetary (Inv, Fixed asset, stock) -Historical
IS-Weighted avg Sales , BS related (Inv,COGS, Amortization) Historical
Translation for foreign currency
BS Assets and Liabilities- year end spot, stock-historic
IS weighted avg always
Deferred tax Asset reported. Reversal of current temporary difference will result in
Deferred Tax Asset is future Tax Saving. Reversal result in future Deductible Amounts. Tis deductions will reduce amount of future tax owned. Company had Profit. If it had a loss DTA would be zero because company would not have future income to use tax benefits.
What item is NOT subject for INTRAperiod income tax allocation
Operating income
Items for intraperiod (within 1 y) income tax allocation:
- Income from Continuing Ops
- Income from Discontinuing Ops
- Accounting Principle Change
OCI
PUFIER
When Income recognized before it is reported as taxable income
deferred tax liability should be reported.
Which statement if correct regarding valuation allowance
The effect of the change in opening balance of valuation allowance that results from a change in circumstances is included in income from operations
Current portion of income tax expense
It’s mount payable to IRS in current year
Income Tax Expense
Taxable Income *Rate%=Currant Tax Expense
Tax Expense-Estimated Tax Payment=TAx Liability
Current income tax liability- Tax due this year
Deferred tax liabilities-Tax due next year
Effective Tax rate
Income Expense/ Pretax Income
Perm differences for tax purpose NEVER TAXIBLE
- Municipal Bonds
- Life Insurance where Comp beneficiary
- Dividends 5% ownership =50% of dividends are not deductible
- Premium of officer life insurance there company is owner
DTL 1. Wait till you collect money: Installments Sales Contractors Accounting % Equity method (Undistributed dividend) 2.Expense now pay later: Depreciation expense/Amortization Prepaid Expense (Cash Basis) Increase in rent receivable, earned but didn't get cah. Pay tax later
Future Tax income is more than IS income, more Tax will be paid
DTA Estimation of future expense: 1.Allowance (Bad debt expense) 2. Warranty Expense 3. Start Up Expense 4. Operating loss carried forward 5.Warranty obligation increase Pay tax now because you got money, save later: Unearned/Prepaid Rent, Interest and Royalties
Future Tax income is less than IS income
Indirect rate. 1 US dollar could purchase 0.75 euro
euro=1/0.75
Calculate Principal amount of lease obligation
Annual lease payments*PV factor (use rate implicit what lessor expect to get
Using strait line method what amount should Lessee recognize as depreciation expense for 1 year?
Depreciation expense=Minimum lease payments/Lease term
Lease recorded as asset/liability at PV of minimum payments. Lease depreciated/amortized over lease term if ownership doesn’t transfer and no written purchase option.
Calculate total amount of interest revenue for the whole life of the lease without purchase option.
Annual lease payment=PV/Annuity due factor
Interest revenue=Total Cash flow- PV of cash flows
Lease Expense=
Payment year, 1/2
JE for operating Lease.
Lessor keeps equipment on his balance sheet
JE for Leese
DR ROU Asser
JE for Lessor
DTA and DT Liability
Always: Non Current regardless of expected reversal date
% of Exclusion of dividend income from Tax return. Permanent difference.
Ownership less 20%-exclude 50%
Ownership 20%-80%-exclude 65%
Ownership over 80%-exclude 100%
Tax return vs GAAP Fin Statement
Tax return- Report % of your share of dividend income
Fin Statement- Equity method (20-50%) Report your share of Sub income
Deferred Tax asset/Liability presented in BS
Net non-current deferred tax assets or liability
NOL 5 years carry back or 18/19/20- No limitation
LOL carry fwd starting 2021 -80% limit
Equity and Dividends received limitation
65%
If expense if negative=DTL
If expense positive-DTA
Income Tax Expense 2 Q
(Income Q1+Income Q2)*Rate Q2-Tax Q1
Reversing valuation allowane
Restoring the asset (benefit) and decreasing income tax expense
