Select Transactions (20-30%)

Question 1

What are the 3 types of leases? What is lease criteria for lessee for Finance lease classification?

Answer 1

ST, Operating, Finance.

Finance for Lessee if 2 extra steps apply:

1) PV of lease pymts+GRV exceed FMV,
2) Probable lessor will receive all lease pymts+GRV.

Question 2

What is JE for ST lease (Lessee & Lessor)?

Answer 2

Lessee: DR Lease Exp, CR Cash/AP.

Lessor: DR Cash/AR, CR Lease Rev.

Question 3

What happens when GRV is less at end of lease?

Answer 3

Lessee pays the lessor the difference (only when guaranteed)

Question 4

How is GRV included in lessee’s lease obligation?

Answer 4

At the beginning of lease and at PV of GRV.

Example: Lease total is $100K, w/PV of $90K. GRV is $10K, w/PV of $9K.

JE: DR Leased Equip. $99K, CR Lease Obligation $99K.

Question 5

What is JE for Operating lease (Lessee & Lessor)?

Answer 5

Lessee: DR ROU Asset, CR Lease Obligation

Lessor: *keeps asset on books & depreciates over lease term

Question 6

How do you calculate the initial JE for Operating lease for lessee?

Answer 6

Annual lease pymts X applicable PV factor based on implicit interest rate (will be given).

Example: Leasing equip. 10 yrs, implicit rate 8%. FMV asset is $100K, w/useful life of 20 yrs. Annual lease pymts is $12K. PV factor annuity due for 10 yrs at 8% is 7.25.

12K X 7.25 = 87K (to capitalize)

DR ROU Asset 87K, CR Lease Liab 87K (to capitalize)
DR Lease Liab 12K, CR Cash 12K (first pymt)

87K - 12K = 75K X 8% = 6K (interest #1 at YE #1)

DR Lease Exp 12K, CR ROU Asset 6K, CR Lease Liab 6K

75K - 6K = 69K x 8% = 5,520 (interest #2 at YE #2)…

Question 7

How do you calculate initial JE for Finance lease for lessee? How do you calculate first payment for Finance lease for lessee?

Answer 7

Similar to operating lease, calculate as annual lease pymt X PV factor based on # of years the lease lasts.

DR ROU Asset, CR Lease Liab (record lease liab)
DR Interest Exp, DR Lease Liab, CR Cash (first pymt)

Question 8

How do you calculate the initial JE for Finance lease for lessor?

Answer 8

Doing reverse of lessee, take FV of equip. +/- GRV/NGRV and dividing by PV factor.

If PV of minimum lease pymts is > FMV at beginning of lease, then amount of leased asset & obligation will be equal to FV of leased asset.

Question 9

How is PV of minimum lease pymts computed?

Answer 9

Using the lesser of implicit rate (if known) or the lessee’s incremental borrowing rate.

Question 10

How are leases under IFRS classified?

Answer 10

all considered finance leases, unless under $5K, then operating lease.

Question 11

How are leasehold improvements capitalized for leases?

Answer 11

Amortized over shorter of:

1) remaining lease term, or
2) useful life of improvement

Question 12

What are the FS required for DBP Plans?

Performance up to Employer

Answer 12

• Statement of Net Assets Available for Benefits (as of end of plan year)
• Statement of Changes in Net Assets Available for Benefits (for plan year end)
• Information on actuarial PV of accumulated plan benefits
• Information regarding effects, of certain factors affecting Y-T-Y change in accumulated plan benefits

Question 13

What are the 5 components of pension expense?

Answer 13

\+ service cost
\+ interest cost
- expected return on plan assets
\+/- amortization of prior service cost
\+/- amortization of net gain/loss

SC = what EEs earn in CY
IC = PBO at BOY X Discount Rate
ERoPA = BOY PA X Expected Rate of Return

Question 14

What is the formula/calculation for PBO?

Answer 14

\+ Beg PBO
\+ service cost
\+ interest cost
\+ prior service cost
- prior service credit
\+/- liability gain/loss
= End PBO

Increase in PBO = PBO Loss
Decrease in PBS = PBO Gain

Question 15

What are the FS required for DCP Plans?

Performance up to Employee

Answer 15

• Statement of Net Assets Available for Benefits (as of end of plan year)
• Statement of Changes in Net Assets Available for Benefits (for plan year end)

Question 16

What is the difference between a DCP and a DBP Plan?

Answer 16

• annual ER contribution is defined
• performance is up to the EE
• much simpler to account for DCP than DBP, ER simply contributes set annual amount into investment account for EE held by 3rd party trustee.

Question 17

What costs are included in R&D? How are R&D costs recorded?

Answer 17

Activities in the development phase.

Expensed.

Question 18

At what phase are costs not considered R&D costs?

Answer 18

Commercial production phase.

Example: Quality control testing during commercial production phase.

Question 19

How are R&D costs recorded under IFRS?

Answer 19

Research costs are expensed, development costs are capitalized.

Question 20

At what phase can software costs be capitalized?

Answer 20

Costs related to software can be capitalized once software has reached technological feasibility.

Question 21

At what phase is software before it reaches technological feasibility?

Answer 21

R&D stage - all costs are expensed (when software being built).

Question 22

When software product is on the market & being sold, how are those costs recorded?

Answer 22

Capitalized costs will start being amortized.

Yearly rate: greater of:

1) ratio of software sales to expected total sales
2) SL method over economic life of software
* can switch between these 2 between years

Question 23

How is software for internal-use only recorded?

Answer 23

Software that will not be sold commercially.

Amortized SL over its useful life.

Question 24

How are transaction costs associated with a business combination recorded?

Answer 24

Expenses as incurred.

Includes: legal fees, audit fees, finder fees, etc.

Question 25

What are the common types of derivatives?

Answer 25

• option contracts
• future contracts
• forward contracts
• swap contracts

Question 26

How are derivatives recognized & measured?

Answer 26

Recognized as asset/liability. Measured at FV. Changes in FV result in G/L that is recognized in earnings.

Question 27

What are some items you would use hedging for?

Answer 27

• commodity price fluctuation risk
• foreign exchange fluctuation risk
• interest rate fluctuation risk
• credit risk

Question 28

What is formula for FV Hedge (FV Risk)?

Firm Commitment

Answer 28

• adj hedging instrument to FV at BS date
• adj hedged item to FV at BS date
• recognize G/L in current income from revaluing each

Question 29

What is formula for CF Hedge (CF Risk)?

Forecasted Transaction

Answer 29

• determine change in PV of expected CF of hedged item
• recognize difference in FV of derivative up to amount of change in PV of expected CF in OCI. This is effective portion.
• amount different than the change in PV of expected CF in current income, is the ineffective portion.

Question 30

In foreign currency transactions, what is the direct rate?

Answer 30

Domestic price of one unit of foreign currency.

1 Euro = $1.57, 1 Peso = $0.32

Question 31

In foreign currency transactions, what is the indirect rate?

Answer 31

Foreign price of one unit of domestic currency.

$1 = 0.87 Euro, $1 = 3.2 Pesos

Question 32

What is considered Functional Currency?

Answer 32

Currency of the primary economic environment that the business operates in.

• except when:
• local economy in hyperinflation (100%+ for 3 straight years)
• foreign operations could not operate without US entity’s operations, then reporting currency is also function currency

*Chilean company’s functional currency would be the Chilean peso.

Question 33

What are the 2 types of foreign exchange contracts?

Answer 33

1) FX Exchange Contract: obligation to buy/sell a foreign currency.
2) FX Option Contract: gives right to buy/sell a foreign currency, but not obligation.

Question 34

What are the 2 types of translating foreign financial statements?

Answer 34

• • Translation:
    
    • A/L translated using spot rate at BS date
    • IS accts translated using WA rate using rate at date items was earned/incurred
    • RE is computed, converted TB will not balance
    • translation adjustment is made to balance TB, in OCI.
• • Re-measurement:
    
    • monetary A/L (AP, AR) translated using spot rate
    • non-monetary A/L (F.A., ppd A, COGS, depr) translated using historical rates
    • rev/exps translated using WA rate using as occurred evenly throughout year.
    • re-measurement adjustment is made to balance TB, in continuing operations income.

Question 35

What is a reacquired right asset?

Answer 35

Asset recognized in a business combination that will require amount recognized to be amortized over future periods.

Right granted by an acquirer to acquiree prior to a business combination that is reacquired when the acquirer gains control of the acquiree or the asset in a business combination.