Present Value

Question 1

Present Value

What is the four criteria for capital lease application?

Answer 1

One of the following criteria must be met in order to qualify for capital lease application

1. Transfer of ownership
2. Bargain purchase option
3. Lease term is 75% or more of asset life.
4. Present value of lease payments equals or exceeds 90% of fair value of asset.

Question 2

Present Value

Describe discount as it pertains to bonds.

Answer 2

A discount is the excess of face value over the proceeds (cash paid) for a bond (i.e., the borrower receives proceeds less than the face value), which is contrasted to a Premium. A discount results when the stated interest rate is less than the effective (market) rate. It is amortized over the life of the bond with the amount of amortization reported as interest and is the difference between the present value of the bond and its face value (where the face value is higher). The discount is recorded on the balance sheet as a contra account inseparable from the bond which gives rise to it. It must be disclosed as a direct deduction from the face amount of the bond.

Question 3

Present Value

Describe the amortization amount as it pertains to a discount on bonds

Answer 3

Bond Interest Expense (carrying amount and effective interest rate)- Bond interest paid ( face amount and stated interest rate) = Amortization amount

Question 4

Present Value

Describe the amortization amount as it pertains to a premium on bonds

Answer 4

Bond interest paid ( face amount and stated interest rate) - Bond Interest Expense (carrying amount and effective interest rate)= Amortization amount

Question 5

Present Value

True or False

The lessee must use the lower of the lessee’s incremental borrowing rate or the discount rate used by the lessor, if known (the lessor’s implicit interest rate).

Answer 5

True

The lessee must use the lower of the lessee’s incremental borrowing rate or the discount rate used by the lessor, if known (the lessor’s implicit interest rate).

Question 6

Present Value

How is a gain from a sale in a capital lease and an operating lease accounted for?

Answer 6

Capital lease- deferred gain

Operating lease- recognize immediately

Question 7

Present Value

How are bond issue costs accounted for?

Answer 7

Bond issue costs are treated as deferred charges and amortized on a straight line basis over the life of the bond.

Question 8

Present Value

State the Bond Proceeds Formula

Answer 8

Present Value of the Principal Payment at Maturity
+ Present Value of Interest Payments Made

= Market Value of Bond Proceeds

Question 9

Present Value

How are Bond Issuance costs accounted for?

Answer 9

Bond Issuance costs are debited to a deferred charge account and amortized over the life of the bond using STRAIGHT LINE DEPRECIATION.

Question 10

Present Value

Define NET bond proceeds

Answer 10

Bond proceeds- Bond Issuance Costs = Net Bond Proceeds

Question 11

Present Value

When do bond issuance cost amortization start?

Answer 11

Bond issuance cost amortization start at the TIME OF ISSUANCE.

Question 12

Present Value

Describe the JE for Bond Issuance between interest date

Answer 12

Dr Cash
Dr Cash Interest
     Cr Premium
     Cr Bond Payable
      Cr Interest Payable

Question 13

Present Value

True or False
For operating leases having noncancelable remaining lease terms of more than one year, the lessee must disclose future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

Answer 13

True

For operating leases having noncancelable remaining lease terms of more than one year, the lessee must disclose future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

Question 14

Present Value

How is rental revenue and rental expense recognized on an operating lease?

Answer 14

The lessor and the lessee recognize rental revenue and rental expense respectively on a straight - line basis unless another systematic and rational basis more clearly reflects the time pattern in which use benefit is given (received) by the respective parties.

Question 15

Present Value

True or False
In an operating lease, a lessee should expense the cost of leasehold improvements.

Answer 15

False

In an operating lease, a lessee should capitalize and amortize the cost of leasehold improvements.

Question 16

Present Value

True or False

For a capital lease, the lessee records as a leased asset and a lease obligation the lower of the PV of the minimum lease payments or the FV of the leased asset.

Answer 16

True

For a capital lease, the lessee records as a leased asset and a lease obligation the lower of the PV of the minimum lease payments or the FV of the leased asset.

Question 17

Present Value

True or False
Both lease accounting under GAAP and IFRS use the term “capital lease”

Answer 17

False

GAAP accounting uses the term “capital lease” while IFRS accounting uses the term “finance lease”

Question 18

Present Value

What is the exception for deferral and amortization of gains in Sale- Leasebacks?

Answer 18

PV of Lease Payments is 10% or less of asset’s FMV

Gain is recoginized

Question 19

Present Value

True or False

Capitalization of the present value of minimum lease payments does not include executory costs such as real estate taxes.

Answer 19

True

Capitalization of the present value of minimum lease payments does not include executory costs such as real estate taxes.

Question 20

Present Value

True or False

Building operating expenses paid by the lessee are considered executory costs and are reported as period expense (i.e., not subject to disclosure).

Answer 20

True

Building operating expenses paid by the lessee are considered EXCUTORY costs and are reported as period EXPENSE (i.e., not subject to disclosure).

Question 21

Present Value

True or False

Sales-type leases give rise to manufacturer’s profit to the lessor defined as the difference between the sales price and the carrying value of the asset.

Answer 21

True

Sales-type leases give rise to manufacturer’s profit to the lessor defined as the difference between the sales price and the carrying value of the asset.

Question 22

Present Value

True or False

For a lessor in an operating lease, an operating lease, the payments received are recognized as rent revenue (rather than interest revenue) and are the same each year.

Answer 22

True

For a lessor in an operating lease, an operating lease, the payments received are recognized as rent revenue (rather than interest revenue) and are the same each year.

Question 23

Present Value

True or False

if a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements

Answer 23

True

if a CHANGE in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under the sale-leaseback requirements

Question 24

Present Value

Define gross lease receivables account

Answer 24

This account keeps track, in undiscounted fashion, of the entire lease rental payments to be received by the lessor.

Question 25

Present Value

The use of the interest rate implicit in the lease is required when

Answer 25

• This rate can be determined and

- The implicit rate is less than lessee’s incremental rate.

Question 26

Present Value

True or False

For lease purposes, executory costs (insurance, maintenance, and taxes) are recognized as expense when incurred.

Answer 26

True

For lease purposes, executory costs (insurance, maintenance, and taxes) are recognized as expense when incurred.

Question 27

Present Value

What are the IFRS rules when a sale is followed by a lease?

Answer 27

For IFRS purposes,

If sale is followed by OPERATING lease, recognize all gain.

If sale is followed by FINANCIAL lease, defer and amortize gain.

Question 28

Present Value

True or False

Bond Issuance Costs are not considered part of carrying value.

Answer 28

True

Bond Issuance Costs are not considered part of carrying value.