Leases, Liabilities and Bonds Flashcards
Capital / Finance Lease = purchase/ownership.
Journal entry? OWNS?
condition to capitalize JE:
Fixed Asset (leased prop): Xx
Liability (obligations under lease) Xx
O- ownership transfers at end of lease (upon final payment or required buyout)
W- Written option for bargain purchase (AKA option to buy not at fair val, but at a bargain val.)
N- Ninety (90%) of leased property Fair Val = PV Of lease payments
S- Seventy-five (75%) or MORE of asset economic life must be committed to the lease. (EG 10 yr lease term, 12 yr economic life)
**for GAAP capital leases, ALWAYS amortize leased property over economic (and not lease-length) life of lease.
Profit in lease transactions?
PVal of Payments
(Less)
Carrying Cost
What is true of a lease capitalized due to “Transfer of Title” or bargain purchase?
Use life of the ASSET, not life of the lease.
What is a ‘Bargain Purchase Option’?
A bargain purchase option is an option in a lease agreement that allows the lessee to purchase the leased asset at the end of the lease period at a price substantially below its fair market value.
The bargain purchase option is one of four criteria, any one of which, if satisfied, would require the lease to be classified as a capital or financing lease that must be disclosed on the lessee’s balance sheet.
The objective of this classification is to prevent “off-balance sheet” financing by the lessee.
Amortizing leasehold improvements?
Either LESSER remaining life of lease, or length to which improvement
Present Value of $1
Amnt that must be invested NOT - so that $1 can be paid/received in the future
(Capital lease buyout at end of lease, bond principal payoff at end of term, US Savings bond)
PV = ANNUAL RENTS x Annuity due PV factor
Once you have annual rents, you multiply by pd. to get to “Gross”, then do gross-net inv.
Future Value of $1
“Compounded Interest” - the amount that would accumulate at a future point if $1 is invested now
- Interest factor causes the future value of $1 to be greater than $1
(Bank savings accounts)
Present Value of an Ordinary Annuity
Current WORTH of a series of identical periodic payments to be made in the future…
(Periodic lease payments, periodic bond payments, winning the lottery)
Future value of an ordinary annuity
SUM, to be received at some pt in the future, of the identical periodic investments made from the present until the future point.
(eg, investing in an IRA)
Interest Rate
When calculating the PVal of the minimum lease payments, the lessee uses the (lower) of:
1) implicit rate (if known)
2) lessee’s incremental borrowing rate (the rate available in the market to the lessee)
Depreciating leased assets?
Cap Lease Assets (less) Sal Val = Depreciable Basis / periods of benefit =
Dep expense per period
Gross Investment
= Minimum Lease Payment + unguaranteed residual val. = lease payment receivable (to lessor)
Net Investment
“Principal”
Gross Investment x PV
Unearned Interest Rev.
Gross investment - net inv.
What should you do with bonus to obtain lease?
Amortize (by month) over life of lease
Capital leaseback?
Operating leaseback?
In a capital leaseback, deferred Gain/Loss is amortized in proportion to the amortization of the leased asset.
Operating: Def gain/loss is amortized in proportion to gross rental expense over life of lease.
Rules abt. deferred gain?
When the seller-lessee retains only a minor portion (PV of leaseback is 10% or less FV of selling price,) any gain should be recognized immediately and none deferred.
How should you record “lease liability” for capital finance lease at beginning of lease term?
Lessee should record at LOWER of
1) Pval minimum lease payments (annual payment x PV factor)
2) FV of assets at inception of lease
How to capitalize a bargain purchase option?
EG:
BP = 10000
Pval of 12% at 10 years = .322
Add this bargain purchase val to “lease liability” at beginning of a lease term.
Rule about unearned interest in a sales-type lease?
Amortized over pd of lease using interest method:
EG, each year you capitalize “interest” based on carrying rate of lease (lessing out lease payments made annually.)
Depreciation on leased assets.
Use life of lease (and not economic life) if lessee does NOT take ownership of the asset by the end of lease, OR if there is no bargain purchase option.
(and always use pval of Minimum Lease Payments to calculate)
Capitalized Val of Lease
(Less) Sal Val = Depreciable Base / 8 year useful (economic) life
Revaluation Gain/(Loss) Calc?
420 FAIR ALUE
(less)
360 Carry Val =
60K gain,
To be recognized in Other Comprehensive Income.
Leaseback deferred gain?
Defer the gain from a lease-back over the life of lease-back.
Possible deferred gain = Sales Price (LESS) Carrying amount
Times this applies for IFRS:
- Finance Lease
- sales price EQUAL TO or BELOW Fair val.
What are the rules about operating lease payments to a lessor that should be DEFERRED?
When to defer:
- security deposits
- prepaid rent
- unamortized portion of non-refundable payments to the lessor for lease-hold modifications
How to determine the market price of a bond?
This is the present value of the principal added to the present value of all interest payments, using the market interest rate.
What is stated interest rate for?
For calculating the amount of interest payments (but not price of bond).
Book Val of bonds?
600K FV + 65K Unamortized Premium
settled at “102”
aka 612,000
$65,000 bond premium gain at date of sale less $12,000 from settlement = $53,000 gain
What happens when the settlement price of a bond is greater than the face value of a debt?
And face val greater than book val?
Means settlement price > Book val
Loss would be recognized on the transaction
What is “Accrued Interest Payable”?
It is the interest owed since the 6/30/Y2 payment (something you calculate on 9/1/Y2)
Using “Effective Interest Rate Method” to amortize bond premium…
I/S: Net Carry Val * Effective Interest Rate = Interest Expense (which incls. the amortization)
B/S: Bond Face * Coupon Rate (stated) = Interest Paid/ Interest PAYABLE
^^ The difference here is Amortization.
What gets put on the bal. sheet for bond sinking funds?
Bon Sinking Fund prev. YE bal + new investments + div rev + int. Rev - (admin expenses)
Carry Val. of Bonds?
Face +/- Unamortized Premium or Discount
Methods of Amortization for Bonds:
straight line: allowed, if it does not differ from effective.
Effective:
Book value method to account for conversions of bonds into stock?
Issue and record at CARRY VAL.
(EG, 1mil less 100K discount)
Thus, stockholders equity will increase exactly by book value that day – $900K.
NOTE:
under market value method you do the APiC thing for market value of conversions.
NOTE:
Conversion feature is considered to have “no value” for GAAP until actual exchange (matching principle)
Define Different Types of Bonds:
- serial
- debenture
- term bond
Serial bonds: Bonds that mature in installments
(example: registered bonds maturing annually, commodity backed bonds maturing annually)
Debenture bonds: Unsecured corporate bonds
Term bonds: Single fixed maturity date
Under IFRS what is true of bond issuance costs?
-They are deducted from the carrying value of the liability.
Bond issuance costs - which should be amortized over life of bond?
ALL.
What are “Bond Proceeds”?
It is the cash received from a bond issuance - ADJUSTED FOR both the disc., AND Accrued interest.
For leases, what does the reduction of lease liability in year 2 equal?
It equals what was shown as “CURRENT LIABILITY” at YE Y1.
Profit and loss on a sale leaseback?
Any profit or loss on a sale/leaseback classified as a capital lease shall be deferred and amortized in proportion to depreciation taken on the leased back asset.
USE: Asset valuation allowance
What is the amount recorded initially, by the lessee, as a liability?
The amount should EQUAL the present value of the minimum lease payments, at the beginning of the lease.
