FAR - Present Value Flashcards
How do you know if it is an annuity in advance or ordinary annuity? Annuity due or ordinary?
This is determined by looking at the last payment. If the last deposit is made one year prior to the date the future amount is needed, these would be beginning of year payments, which is an annuity in advance.
Future Amount / FA factor = Payments
An annuity due is an annuity with the first pmt occurring at the beginning of the first period. An ordinary annuity has first pmt occurring at end of first period.
How do you calculate interest expense if given loan amount, interest rate, and payment amount and number of payments?
Example, 9/30 borrow 1M on 9% note payable in 4 quarterly payments. First payment of 264.2k was due on 12/30.
Interest paid in year is expense, else it is accrued.
Interest expense = Loan amount X interest rate X months/year
Interest expense of 22500 = 1M X 9% X 3/12 months
1/1/10 Company lent 100k to supplier, payable in 5 years, interest 5% annually with first pmt at end of year. Going rate of interest for this type of loan is 10%. The parties agreed that the company inventory needs for the loan period will be met by supplier at favorable prices. PV at going rate of interest of 100k note is 81k at 1/1/10. What amount of interest income should be included in companys 2010 IS?
Solutions approach:
1. a note has been issued for cash and a future benefit
2. the provision for interest on the loan is not reasonable
The difference between the face value of 100k and its PV of 81k is the interest on notes receivable of 19k.
Carrying value of note X implied interest rate = interest income
81k X 10% = 8.1K
What is reported as current maturities of LT debt in the 2010 YE BS?
Note due 2011 of 3k
Note due 2014 107k
Note due in 11 equal annual principal payments, plus interest at 8% beginning Dec 31, 2011 of 110k
7% guaranteed debentures due 2015 of 100k
Annual sinking fund requirement on guaranteed debentures is 4k/year
The portion of bonds, notes, and other LT debt that matures within the next year is called current maturities of LT debt and is reported as a current liability, the balance is long term.
The 3k note due in 2011 plus 10k for the installment of the 8% note should be reported as current maturities of LT debt.
Note sinking fund requirement is not debt.
How do you use FV factors and PV factors?
PV amount = PV factor X future amount
PV amount X FV factor = Future amount
ASC835 - how would a note payable that is better than the going rate be recorded in FS? Which rate is used to determine interest expense. How is the benefit recorded (ex, if favorable prices are given for company’s inventory needs)?
It is recorded at its current PV by establishing a discount account
Dr Cash 200
Dr Discount on NP 65
Cr NP 200
Cr Unearned income 65
Effective interest method is used to determine interest rate, meaning going rate, not given rate.
Interest expense is equal to the PV of note X effective interest rate. Unearned income is recognized as benefit is given.
When do you use the fixed rate or the market rate of interest?
If company does not elect the FV option to report financial assets, the market rate is irrelevant.
If bank approves loan and incurs loan origination costs (attorney fees, title insurance, wages of employees direct work on loan origination) how are they recorded?
Deferred and recognized over the life of the loan as an adj of yield (interest income). The lender will defer and recognize loan origination costs over the life of the loan when the costs relate directly to the loan and would not have been occurred but for the loan.
What is a 3 point nonrefundable fee?
Each point is 5K
When is the effective interest rate greater than the stated interest rate?
Ex: Loan of 500k with 10% interest, has loan origination costs of 10k and charges borrower 3 point non refundable fee. What is EIR to lender?
Explain EIR.
The carrying amount would be the 500k loan less the 15k non refundable fee plus the 10k loan origination costs. A carrying amount less than the face value will yield an EIR > stated interest rate.
The effective interest rate is what is effectively earned on the initial cash outflow (adjusted for fees) when the borrower will pay back principal for the total loan amount of the stated amount before adjustments. For example, even if the loan is 200k at 11%. If the borrower pays 6k fee to make it a net borrowing of 194k. The payments for the borrower are still based on the total loan amount of 200k so the EIR for the lender is likely higher than 11%.
How can you solve a PV problem for an annuity due if only given ordinary annuity factors?
Since it is annuity advance, you can take the first payment separately and calculate the remained as a ordinary annuity less the one pmt, which is added on at the end.
OR you could take the ordinary annuity factor and add 1 to it, then multiply by the payments.
ASC835 - what happens when a note is exchanged for property, goods or services, what are the conditions for the stated interest rate in determining if it is fair or not?
Example 16% note when market rate is 11% on note and was used to finance purchase of holiday merchandise.
Is there a difference if the note is greater than or less than one year?
The stated interest rate is presumed to be fair unless:
1. interest is not stated
OR 2. stated rate is unreasonable
OR 3. current cash price of the property goods or services is materially different from the market value of the note.
If this happens, then the note and the cost of the property goods or services should be recorded at the FV or the market value of the note, whichever is more clearly determinable.
The 16% is unreasonable compared to 11%.
If the note is >1year, inventory would be at market value of note, since inventory could not be priced at the time. A premium would be recorded (since the stated rate>market) and amortized over term of note.
Since it is less than 1 year, the inventory and note can be at face value. COGS could be understated by the difference between the face value of the note and the PV.
How is interest payable determined?
It would be at the stated rate for the length of time passed.
What are IFRS rules on borrowing costs?
Borrowing costs must be capitalized if they meet certain criteria.
Borrowing costs that do not meet the rules for capitalized are expensed in current period.
In 2010, Company exchanges equipment for 200k non interest note due in 3 years. The prevailing rate of interest for a note of this type is 10%. The PV of $1 at 10% for three periods is .75. What interest revenue should be included in 2nd year, 2011 IS?
ASC835 - when property is exchanged for a note and neither the property nor the note has a known FMV, interest is imputed using the prevailing rate of interest for a similar note.
The note would be recorded at its PV of 150k (200k X 0.75) by debiting notes receivable for 200k and crediting discount on NR for 50k.
Discount is amortized and recognized as interest revenue over the life of the note using the interest method.
Under the interest method, interest revenue/expense equals the carrying value of the note multiplied by the imputed interest rate. For 2010, interest revenue is 15k.
Discount on notes receivable is debited for the amount of interest revenue recognized (15K) which increases the carrying value of the notes to 165K. In 2011, the interest revenue would be 16.5k.
What happens under the interest method? How is interest rev/exp calculated then?
Under the interest method, interest revenue/expense equals the carrying value of the note multiplied by the imputed interest rate.
When is the present value of annuity factor used vs the present value factor of 1?
How about future amount of annuity factor and future amount of 1?
Present value factor of 1 is used for lump sum payments.
Present value of annuity factor is used when there are annuity payments.
Future amount of annuity would be used in computing annuity payment and not cost. Future amount is used to find the payment and not cost.
What is the journal entry to recognize a gain or loss when a building is exchanged for a note?
DR note receivable 400 (face value)
DR accum dep 160
CR discount on NR 116 (to bring NR balance to PV)
CR building 380
CR Gain 64 (difference between value of consideration received and book value of building sold)
IFRS - how is discount rate for pensions determined?
Market yield at the end of the reporting period for high quality corporate bonds having a similar term or maturity
Pension liability exists when…
Define pension asset/liability
Projected benefit obligation exceeds fair value of pension plan assets. Liability must be recognized in the balance sheet then, NOT in statement of SE
Pension a/l is the cumuative excess of the amount funded over the amount recorded as pension expense.
ASC715 what is the periods to be included in the disclosure of assumed health care cost trend rates for defined benefit postretirement plans?
The assumed health care cost trend rates should be disclosed for the following year and years beyond the following year
715 - How do you calculate net pension cost/expense?
+ Interest cost on PBO
+ Service costs determined by actuarial PV
- Actual return on plan assets
+ Amortization of unrecognized prior service cost aka amortization of unrecognized net obligation (and loss or cost) or unrecognized net asset (and gain) existing at date of transition
+ Amortization of actuarial loss
= Pension cost
Service cost and interest on PBO always increase pension expense, return on plan assets almost always decrease pension expense.Amortization of loss or obligation increase pension expense.
What does the excess of ABO (accumulated benefit obligation) over the FV of plan assets represent?
It represents the unfunded accumulated benefit obligation which could require recognition of an additional minimum liability which must be disclosed. It is NOT used for calculating net pension cost.
What does the interest cost on PBO represent?
Defined as the increase in the amount o the projected benefit obligation due to passage of time.
How do you calculate net periodic and accrued post retirement benefit cost?
What is the journal entry and when is it accrued?
Service cost + interest on accumulated postretirement benefit obligation + amortization of unrecognized transition obligation = net periodic postretirement benefit cost
If the net postretirement benefit cost exceeds the cash payment to employees, accrued postretirement benefit cost is recorded.
DR Postretirement benefit cost 41k
CR Cash 10k
CR Accrued postretirement benefit cost 31k
What happens if there are plan amendments resulting in a change to PBO?
The prior service cost resulting from the amendment should be amortized by assigning an appropriate amount to each future period of service of each employee who is expected to receive benefits under the plan at the date of the amendment.
The amortized amount should be included in pension expense during those future service periods.
