Lecture 5 Flashcards
bond sinking fund
Bond sinking funds are accounted for in their own account including investments plus revenues(div,int)
less expenses.
Depreciable life
This lease will be accounted for as a capital lease because the lease term of five years is 75% of the economic life of six years. Assets acquired under capital (finance) leases are depreciated using the same theory as purchased assets. The purchase option is for “ fair value.” It is not a “bargain purchase option” therefore the assumption cannot be made that Douglas Co. will acquire the machine at the end of the lease period. As a result, the machinery should be depreciated over the five-year lease term under both IFRS & U.S. GAAP.
BPO
A bargain purchase option payment is included as part of the minimum lease payments to be discounted to the date of inception of the lease because it is a future cash flow that is considered certain
Lease JE - initial entry
Equipment under finance lease
obligation under lease
Lease JE- First payment
Obligation under capital lease
Interest payable ( not in first year)
Cash
Lease JE: depreciation
leased asset / lease term
Lease JE
Interest exp Pv*int rate (lesser of)
interest payable
Sales lease back
Recognition of a gain resulting from the sale in a sale-leaseback should be deferred when the seller-lessee retains the right to substantially all of the remaining use of the property (as in a capital lease).
Lease interest expense
The debt was incurred on December 31, Year 1. The initial payment was made on December 31, Year 1. No interest expense is recognized since no time has passed between when the debt was incurred and the payment was made. Thus, the full amount of the payment reduces the lease liability.
Calculate payments
The fair value of the equipment is equal the present value of the future cash flows.
PV=annual rents*annuity due pv factor
ANNUAL RENTS *TERM= TOTAL CASH FLOWS
TOTAL CASH FLOW- PV OF CF=INTEREST REV
Read carefully
The initial lease receivable equals $135,000. After the first lease payment is received two days later, the lease receivable equals $115,000 ($135,000 less $20,000). Year 1 interest revenue equals $5,750 ($115,000 x 10% x 6/12).
Guaranteed residual value
Guaranteed residual value is, in effect, an additional lease payment and must be included in the calculation of the present value of the minimum lease payments
Lease inducement
Annual rental revenue equals the total rental revenue from the lease allocated over the full life of the lease. In this case, revenue equals total cash divided by five years.
interst rate - leases
use lessor of to calculate the PV and also the interest
Sales Type lease
The excess of the present value of the selling price over its cost is recorded as profit.
Depreciation - include salvage value -leases
When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on the life of the asset, not the lease. The cost includes the bargain purchase price. Depreciation cannot be taken below the salvage value.
Rent expense - operating lease
Rent expense should include the first month’s rent and an allocated portion of the bonus. The last month’s rent should be shown as a prepaid expense.
Leasehold improvements
Leasehold improvements should be amortized over the lesser of the remaining life of the lease (6 years), the life of the improvement
leaseback
Because no present value information is given, we must assume that the Plane 1 lease is “major.” It qualifies as a capital lease because it meets the 75% test (8 year term out of 10 year life is 80%). In “major” sale-leasebacks, all gain is deferred. We must also assume that the Plane 2 lease is “minor” because it will be classified as an operating lease (it fails all “OWNS” tests we are able to perform based on the given information). In “minor” sale-leasebacks, there is no deferral.
Deferred gains on sales leaseback
Under U.S. GAAP, when the seller-lessee retains only a minor portion (PV of leaseback is 10% or less of FV of the asset sold), any gain should be recognized immediately and none deferred.
Estimated value at end of lease
not included in PV of MLP
capital leae
Rule: if any one of the following conditions is met, a lease is considered a capital lease under U.S. GAAP and is treated as if owned by the lessee:
The lease transfers ownership to the lessee by the end of the lease term.
The lease contains a bargain purchase option.
The present value at the beginning of the lease term of the “minimum lease payments” equals or exceeds 90% of the fair value of the leased property.
The lease term is 75% or more of the estimated economic life of the leased property.
interest revenue/expense
interest expense/rev for the next period is included in the current period
Sales Type
Cash selling price =PV
Rule: In a sales-type (finance) lease, any difference between the fair value of the leased asset and its carrying value is recognized as manufacturer’s or dealer’s profit:
Depreciation term
Lease should be depreciated (amortized) over the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a bargain purchase option.
IFRS sales leaseback profit
ule: Any profit on a sale-leaseback which is classified as a capital (finance) lease should be deferred and amortized in proportion to depreciation taken on the leased-back asset
annuity due vs ordinary annuity
annue due begining of period
ordinary annuity end of period
IFRS criteria
If the present value of the minimum lease payments amounts to 88% of the fair value of the asset, the lease would be classified as an operating lease under U.S. GAAP and would most likely be classified as a finance lease under IFRS. Under IFRS, a lease is classified as a finance lease if the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. An argument could be made that 88% is “at least substantially all of the fair value of the asset.”
IFRS direct cost of lease
Under IFRS, initial direct costs must be added to the finance lease asset at lease inception
finance lease asset PV+direct costs
lease bligation PV
cash direct costs
leased asset
balance on lease asset - take out depreciation
IFRS SALE LEASEBACK
he entire gain is deferred. The leaseback will be classified as a finance lease because the lease transfers substantially all the risks and rewards inherent in ownership to the lessee (the present value of the lease payments is substantially all of the fair value of the leased asset and the lease term is the entire economic life of the asset). When the lease in an IFRS sale-leaseback transaction is classified as a finance lease, all profit is deferred and amortized over the lease term.
IFRS SALE LEASEBACK
Under IFRS, recognition of a gain resulting from a sale-leaseback transaction should be deferred and subsequently amortized if the lease is classified as a finance lease, or the lease is classified as an operating lease and the sales price is above fair value. If the lease is classified as an operating lease and the sales price is equal to fair value, the gain is recognized immediately. If the lease is classified as an operating lease and the sales price is below fair value, the gain is recognized immediately (although losses may be deferred in certain circumstances).
Lessor
Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. The reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.
Prepaying rent
remember how to account for it
Operating lease
Operating lease expense must be recorded equally over the life of the lease. The average annual lease amount is $30,000 per year, or $2,500 per month.
Operating lease
Rule: Operating lease payments to a lessor that should be deferred include security deposits, prepaid rent, and the unamortized portion of non-refundable payments to the lessor for leasehold modifications.
If an item is expected to be expensed or returned within one year or less, it is classified as current; otherwise it is long term.
Sales type lease
Rule: In a sales-type (finance) lease, the difference between the fair value of the leased asset and its cost at inception is recognized as manufacturer’s or dealer’s profit:
current iability
payment - interest =current liability
sales type lease
In a sales-type lease, cost of goods sold is equal to the historical cost of the asset sold less the present value of the non-guaranteed residual value discounted over the life of the lease. By definition, cost of goods sold will be less than the historical cost of the asset sold.
if payment made upfront
than leased asset will be different than lease obligation. remember that depre is calculated based on asset
occupancy expenese
Occupancy expense would include the amount recognized as rent expense per the agreement plus depreciation. Rent expense takes into consideration amortization of the lease bonus over the life of the lease and depreciation of leasehold improvements over the shorter of the life of the improvements or the life of the lease. The security deposit is recorded as an asset until refunded at the end of the lease term.
rent expense
The lessee should begin the recognition of rental expenses for the new office in January as rent expense is recorded over the lease term.
Sales leaseback
GAAP requires that a loss to be recognized immediately in a sales-leaseback transaction when the fair value of the property at the time of the sale-leaseback is less than book value. Accordingly, the shipping company will recognize a loss in the current year because the fair value at the time of the sales-leaseback transaction was less than the undepreciated cost.
lease bonus
he appropriate accounting treatment for a lease bonus to the lessor in an operating lease is that the bonus is originally recorded as deferred revenue and then amortized into income over the life of the lease.
depreciation term
With a capital lease, the lessee should amortize the leased property over the economic life of the asset when there is a bargain purchase option or when the lessee takes ownership of the asset at the end of the lease term.
B/P
To determine the market price of a bond, the present value of the principal is added to the present value of all interest payments, using the market(effective) interest rate.
Interest payments
Interest payments on bonds are usually made semi annually. Bonds are ussually issued between interest dates, which requires additional entries for accrued interest. Bond issue proceeds plus accrued interest =l Total cash proceeds
Initial entry
Cash
Premium on bonds payable
Bond Payable
interest entry
Bond interest expense (NCVeffective rate)
Premium on bonds payable ( bnd int exp-fvcoupon rt)
Cash
Bond premium and bond discount
At premium is when a bond is issued above its value. when you amortize the premium you debit the premium. Amortization of the premium reduces the carrying value of the payable. vice versa for discount
carrying value of bond
CV=discount+premium+amortized discont-amorti premium
Maturity date
the bond carrying value will be the maturity value, regardless of the amortization method used, since this is the maturity date.
Bond carrying value
Bond Carrying value less unamortized plus unamortized premium discount less unamortized bond issued costs
convertible bonds ( BV method)
B/P Cost
Preimium on B/P (% converted*premium)
C/S Par
APIC plug
convertible bonds ( MV method)
B/P Cost Preimium on B/P (% converted*premium) Loss on conversion plug C/S Par APIC FV-PAR value
Detacheable warrant ( Initial) warrants only method
Cash
Discount on B/P plug
B/P
APIC Warrants FV
half are exercised ( Warrants only method)
Cash
APIC-Warrants 50% of apic warrats
C/S
APIC plug
Detacheable warrant ( Initial) book value
Cash sold at
Discount on B/P plug
B/P
APIC Warrants (fv warrant/total value )*sold at price
interest expense
Interest expense is recognized for the entire period from bond issuance (June 1) through the fiscal year end (December 31).
Bond issue costs
Cash
discount
bond issue cost
Bonds payable
Bond issue costs
Bond issue costs are recorded as deferred charges, and amortized over the life of the related debt. Amortization usually follows the straight-line method. Amortization for 1 1/2 years should have been recorded.
