Far 10 Flashcards
When a transfer of a leased asset occurs, how is the financial liability calculated?
How is the gain calculated?
The difference between the sale price and the fair value of the asset.
Sale price - Fair value of asset = Financial liability
Fair value of asset - Carrying value of the Asset = Gain
If a derivative instrument that is not designated for hedging purposes, produces cash flows, where would it be reported?
On the investment activity on the statement of cash flows
For an operating lease that has an increase in payments every five years, will lease and interest expense be effected in the sixth year after the percentage of payments increase?
No change in lease expense and no change in interest expense because the lessee records operating lease as a lease expense using the straight line method. The variable payment is known at the beginning of the lease so the variable increase will be included when calculating the present value of the lease liability.
There is NO separately recorded interest component for an “operating lease”
When given a problem with amount and possible outcomes for tax benefits use the cumulative probability of occurring. Also which number would you use of the percentage of cumulative probability of occurring is 55% and 100%? -Uncertain tax position question.
if the 55% is $30K and the 100% is $10K, the entity would recognize the $30K.
Recognize the amount that has a more than 50% chance of occurring. Less than 50% cannot be recognized.
When given accrual method and installment method for two years and asked to calculate deferred income tax liability, how do you calculate the temporary difference and which tax percentage do you use to solve for the Deferred income tax liability?
Year 1) Accrual Method - Installment method = Temporary difference
Year 2) Accrual method - Installment method = Temporary difference
Total = Y1 temp diff + Y2 Temp Diff
Use enacted future tax rate = %
Total Temp diff * Enacted tax rate % = Deferred income tax liability
What impact does an increase in the valuation allowance account for a DTA and a decrease in the tax rate have on DTA?
The DTA will decline.
When does the recognition of lease expenses begin for the lessee?
On the date of commencement, this is the date that the underlying asset is made available for use to the lessee. When control is transferred.
Lease expense is recorded over the term of the lease.
What would affect current year income tax in year 3?
Change in income tax rate for year 3. This affects income tax expense.
Why would an entity purchase a put option on stock?
Put options lock in the sale price of the stock. Benefits if stock price goes down. Will also benefit if stock price goes up.
Ex: Cherry stock has increased in price, but Grey is concerned that the price might decrease.
When given Deprecation difference and warranty expense how is the deferred portion of provision for income taxes calculated?
Depreciation difference - Warranty expense = Temporary difference
Temporary difference + Enacted Tax Rate = Deferred Taxes Payable
Make sure to use the proper tax rate for different years*
Add up the deferred taxes payable to report in the year 1 income statement.
When should a lessee recognize amounts probable of being owed under a residual value guarantee as a component of lease payments?
On the commencement date of the lease,
Other items that are calculated at lease inception at present value are: fixed payments, variable payments, exercise price of purchase option, termination penalties, and the probable amount owed of the guaranteed residual
What does the OWNES acronym stand for Leases?
O = Ownership transfer
W = Written option to purchase
N = Net Present Value is below threshold needed to be considered equal to the FV of asset - 90%
E = Economic life of asset must be greater or = 75%
S = Equipment is specialized
When tax depreciation > Book deprecation, what kind of tax effect does this create?
A Deferred Tax Liability
Take the difference between Tax depreciation and Book depreciation and multiply it by the enacted tax rate to solve for the DTL.
What does not accurately describe a derivative instrument?
Most derivative instruments are measured at Fair Value.
ALL DERIVATIVES ARE MEASURED AT FAIR VALUE NOT MOST
What method of accounting does GAAP require Not for profits organizations to report on their F/S?
Full accrual basis of accounting
