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FAR > F6 > Flashcards

F6 Flashcards

1
Q

Fnancial lease

A

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

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2
Q

Failed sale

A

If underlying lease in sale-leaseback is finance lease it is considering repurchase failed sale

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3
Q

Operating lease JE for Lessee

Total Interest Amount: CV ROU from contract-PV of ROU Asset

A
  1. DR ROU Asset (Payments (Annuity)*PV
    CR Lease Liability
  2. 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

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4
Q

JE Operating Lease for Lessor (Owner)

Lessor has no interest income in Operating Lease. Only Rental Income!
Lessor keeps equipment on his balance sheet

A
  1. DR Lease Receivable (Annual payment*# of payments)
    CR Unearned Lease Rent Income
  2. 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
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5
Q

What rate to use to calculate PV of lease Payments?

A

The rate implicit in the lease if known

by lessee /% Rate what lessor expects to return

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6
Q

Calculate total lease consideration

A

Baseline Payments-Lease Incentive+ Guaranteed Payment

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7
Q

The reduction of the lease liability in Year 2

A

Should be equal to the current liability shown for a lease for year one (Principal due in year one)

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8
Q

Depreciation by lessee if transfer title

A

(Lease total - minus salvage value- FV)/asset life. Depreciation can’t be less than salvage value

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9
Q

Calculate lease liability if residual value of asset given

A

PV of annuity for annual payment +PV of for 1$ for residual value

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10
Q

Sales type finance lease. Calculate profit and interest.

A
  1. Profit recognized 1 year. Lease amount (price) - Cost of equipment
  2. Interest revenue. Lease Price-immediate paymentlease %1/2 year if not full year
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11
Q

Depreciation Expense for Finance Lease with no purchase option

A

PV of minimum lease payments/ LEASE TERM

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12
Q

If 1st payment due on signing:

A

Take less years for calculating PV factor and amortization

To recognize asset PV lease payment+1st payment at the date lease was signed

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13
Q

What is the total amount of interest revenue over the life of the lease?

A

PV/FAIR VALUE of equipment =ANNUAL RENTPV FACTOR
*Annual rent=FV/PV factor
Interest Revenue
INTEREST REVENUE=TOTAL CASH FLOW -LESS PV

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14
Q

ROU Asset

A

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

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15
Q

Profit on the sale for lease equipment

A

Present value of payments minus Carrying Cost of equipment = Profit on Sale

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16
Q

Lessor JE to record Sales Type lease

A

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
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17
Q

Direct Financial Lease

A

Present Value + Residual Value=FV Asset

Colectibility Probable

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18
Q

Operating Lease (Income Statement)

A

One expense: Lease Expense included in income from continuing operations in IS

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19
Q

Finance Lease Lease (Income Statement)

A

Two Expenses: In Income statement included:
Amortization of ROU asset
Portion of Lease Expense elated to interest on the lease liability

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20
Q

If residual value of leased equipment paid by 3dr party

A

Don’t include in total amount f lease obligation

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21
Q

Derivatives. No cash outflow except options.

A

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

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22
Q

Intrinsic value

A

Difference between the market price and present strike price at point of time

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23
Q

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?

A

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

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24
Q

If option was not exercised

A

Must be reported at FV on BS with unrealized gains and loses reported in net income

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25
Q

Settlement amount for option?

A

Notional amount(how many)*underlying (price or rate)

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26
Q

SWAP derivative fixed rate to variable rate

A

CF Hedge. OCI

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27
Q

Translation-OCI

A

Remeasurement -Income Statement

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28
Q

Don’t record any initial JE for derivatives when company takes long/short position

A

Except options if premium was paid

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29
Q

JE for CF hedge at BS Date (Keep asset at market value). There is no initial JE for Hedge.

A

DR Cash Flow Hedge

CR OCI

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30
Q

JE CF Hedge at settlement

A 
DR Cash (Net settlement price: Inventory beginning price minus settlement price,gain/loss included)
        CR CF Hedge
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31
Q

JE CF Hedge when inventory sold

A

DR AR
CR Sales
DR OCI
CR Gain on CF hedge (reclass to IS from OCI)

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32
Q 
Option type -Call (Buy). 
Underlying 5000 pieces
Strike Price-$22
Premium-$3
Option exercised when stock jumped to $30
A

Benefit if Price goes up:

Profit: 30-22-3=5*5000

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33
Q

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.

A

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.

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34
Q

Derivative transaction with no hedge designation. Hold for trading purpose.

A

Goes to IS, CF Operating

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35
Q

Put option

A

When Put option “in the money” buyer exercises option, if out of the money-note. Strike exercise price vs market price

36
Q

Intrinsic value

A

Difference bw market price and strike price at point of time. If increased:
DR Asset
CR Unrealized gain

37
Q

Option Contract is Derivative with no hedging option

A

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)

38
Q

Long hedge ( manufacturer buy wheat)

A

You worry that price will go up

39
Q

Short hedge (farmer) sells wheat

A

You worry price will go down

40
Q

If you buy Call or Put option

A

You buy Asset:

41
Q

If you sell Call or Put Option

A

You own Contingent liability

42
Q

If you buy Call Option

A

You win, if Price of stock goes up because you can by it for cheaper price and sell for current price paying Premium

43
Q

If you buy a Put Option

A

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.

44
Q

Net investment hedge

A

Goes to Cumulative translation Adj OCI

45
Q

CF Hedge effective Portion

A

OCI

46
Q

If you sell a call

A

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

47
Q

Total loss/gain on selling Option

A

(Mkt price-strike price)=Total gain/loss
Reduce loss for premium if buyer wins
If Option was not exercised, gain-sum of premium

48
Q

Swap pay fixed rate get variable rate (cash outflow)

A

CF hedge

49
Q

If Derivatives with no hedge designation being held for trading purposes

A

Net Cash reporting in Operating sections

50
Q

No Hedge designation derivatives transaction (speculation)

A

Gain recorded in IS

CF reflected in Investing section

51
Q

Derivatives

A

ALL Derivatives measured at FV

52
Q

Which instrument has the least credit risk

A

Futures contract as it made through clearing house which guarantees transaction

53
Q

Remember!

A

Comprehensive income=Net Income + OCI so changes in FV Hedge and Ineffective Portion of CF Hedge impact Comprehensive Income

54
Q

If you compare strike price in Put/Call option REMEMBER:

A
  1. Find difference strike minus market and only then deduct premium.
55
Q

Calculate when Customer will gain if strike price $10 per share and premium $2

A
  1. Put option at 7$ current mkt price.
    Price went down, but customer exercise option to sell for $10. Gain $10-$7=$3-$2=$1
  2. Call option at $12 mkt price. Customer can buy for $10. Gain $12-$10-$2=$0
  3. Put option and $13 mkt. Customer won’t exercise right to sell for $10 when he can sell for $13
  4. Call and $8 mkt. He won’t exercise right to buy for $10 when he can buy it at $8.
56
Q

FV Hedge

A 
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

57
Q

Under Translation Method translated:

A

Capital -Historical Rate
All IS accounts-Weighted avg
BS-Year end spot

58
Q

Under Translation Method translated:

Income from continuing operations, at gross amount

A

Capital -Historical Rate
All IS accounts-Weighted Avg
BS-Year end spot

59
Q

Remeasurement currency rates

A

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

60
Q

Translation for foreign currency

A

BS Assets and Liabilities- year end spot, stock-historic

IS weighted avg always

61
Q

Deferred tax Asset reported. Reversal of current temporary difference will result in

A

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.

62
Q

What item is NOT subject for INTRAperiod income tax allocation

A

Operating income

Items for intraperiod (within 1 y) income tax allocation:

  • Income from Continuing Ops
  • Income from Discontinuing Ops
  • Accounting Principle Change

OCI
PUFIER

63
Q

When Income recognized before it is reported as taxable income

A

deferred tax liability should be reported.

64
Q

Which statement if correct regarding valuation allowance

A

The effect of the change in opening balance of valuation allowance that results from a change in circumstances is included in income from operations

65
Q

Current portion of income tax expense

A

It’s mount payable to IRS in current year

66
Q

Income Tax Expense

A

Taxable Income *Rate%=Currant Tax Expense

Tax Expense-Estimated Tax Payment=TAx Liability

67
Q

Current income tax liability- Tax due this year

A

Deferred tax liabilities-Tax due next year

68
Q

Effective Tax rate

A

Income Expense/ Pretax Income

69
Q

Perm differences for tax purpose NEVER TAXIBLE

A
  • 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
70
Q 
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
A

Future Tax income is more than IS income, more Tax will be paid

71
Q 
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
A

Future Tax income is less than IS income

72
Q

Indirect rate. 1 US dollar could purchase 0.75 euro

A

euro=1/0.75

73
Q

Calculate Principal amount of lease obligation

A

Annual lease payments*PV factor (use rate implicit what lessor expect to get

74
Q

Using strait line method what amount should Lessee recognize as depreciation expense for 1 year?
Depreciation expense=Minimum lease payments/Lease term

A

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.

75
Q

Calculate total amount of interest revenue for the whole life of the lease without purchase option.

A

Annual lease payment=PV/Annuity due factor

Interest revenue=Total Cash flow- PV of cash flows

76
Q

Lease Expense=

A

Payment year, 1/2

77
Q

JE for operating Lease.

Lessor keeps equipment on his balance sheet

A

JE for Leese
DR ROU Asser

JE for Lessor

78
Q

DTA and DT Liability

A

Always: Non Current regardless of expected reversal date

79
Q

% of Exclusion of dividend income from Tax return. Permanent difference.

A

Ownership less 20%-exclude 50%
Ownership 20%-80%-exclude 65%
Ownership over 80%-exclude 100%

80
Q

Tax return vs GAAP Fin Statement

A

Tax return- Report % of your share of dividend income

Fin Statement- Equity method (20-50%) Report your share of Sub income

81
Q

Deferred Tax asset/Liability presented in BS

A

Net non-current deferred tax assets or liability

82
Q

NOL 5 years carry back or 18/19/20- No limitation

A

LOL carry fwd starting 2021 -80% limit

83
Q

Equity and Dividends received limitation

A

65%

84
Q

If expense if negative=DTL

A

If expense positive-DTA

85
Q

Income Tax Expense 2 Q

A

(Income Q1+Income Q2)*Rate Q2-Tax Q1

86
Q

Reversing valuation allowane

A

Restoring the asset (benefit) and decreasing income tax expense

FAR (12 decks)

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