Working Capital & Fixed Assets

Question 1

In a sale-leaseback transaction accounted for under IFRS, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:

Answer 1

I. The seller-lessee accounts for the lease as a finance lease.
II. The seller-lessee accounts for the lease as an operating lease and the sales price is above fair value.

Question 2

What are the components of the lease receivable for a lessor involved in a direct-financing lease?

Answer 2

The minimum lease payments plus residual value.

Question 3

Depreciation Life of Capital assets

Answer 3

Ownership transfer = asset life
Bargain purchase option = asset life
90% of FV = lease life
75% of life = lease life

Question 4

In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized under U.S. GAAP when:

Answer 4

The seller-lessee retains the right to substantially all of the remaining use of the property.

Question 5

At the inception of a capital (finance) lease, the guaranteed residual value should be:

Answer 5

Included as part of minimum lease payments at present 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.

Question 6

Debt Extinguishment

Answer 6

Many companies and agencies extinguish (or refund) long-term debt prior to maturity as a method of managing financial risk. In this case, the refunding is not considered an extraordinary event because it is not unusual and infrequent. The gain (retirement price less carrying amount of the old debt) will be included as part of continuing operations.

Question 7

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is not more than either of the (1) cash paid to seller (2) face amount of bond

Answer 7

For discounts:
The carrying value is less than the cash paid by the investor because accrued interest is included in the cash.
The carrying value is less than the face amount of the bond because it was purchased at a discount.

Question 8

characteristics of convertible debt under IFRS?

Answer 8

Under IFRS, both a liability (bond) and an equity component (conversion feature) should be recognized when convertible bonds are issued. The bond liability is valued at fair value, with the difference between the actual proceeds received and the fair value of the bond liability recorded as a component of equity.

Question 9

When purchasing a bond, the present value of the bond ‘s expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

Answer 9

PRICE:
The issue price of a bond is a function of two different cash flows, one a lump sum and the other a regular stream of payments. First, we need to present value the eventual return of principal using present value tables and factors at the market or effective rate of interest, also known as the yield. Second, we need to present value the regular interest payments, whether annual or semiannual, using present value of an annuity tables and factors at the same market or effective interest rate (yield). Remember that the face rate of interest only has one job, and this is to compute the regular interest payments. It’s the market rate of interest that will determine the bond’s selling price.

Question 10

When the effective interest method of amortization is used for bonds issued at a premium, the amount of interest payable for an interest period is calculated by multiplying the:

Answer 10

Face value of the bonds at the beginning of the period by the contractual interest rate.

Question 11

At the time the warrants are exercised, total stockholders’ equity is increased by the:

Answer 11

cash received upon exercise of the warrants, but not by the carrying amount of warrants.

Question 12

Serial vs Debenture Bonds

Answer 12

Serial bonds are redeemed pro-rata over the life of the issue.
Debenture bonds are unsecured bonds

Question 13

If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders’ equity?

Answer 13

Interest expense - overstated

Stockholders equity - understated

Question 14

An investor purchased a bond classified as a long-term investment between interest dates at a discount. At the purchase date, the carrying amount of the bond is:

Answer 14

The carrying value is less than the cash paid by the investor because accrued interest is included in the cash.
The carrying value is less than the face amount of the bond because it was purchased at a discount.

Question 15

What is generally associated with the terms of convertible debt securities?

Answer 15

The interest rate on convertible debt is generally lower than nonconvertible debt because of the value of the conversion feature.

Question 16

For discounts, An interest expense that is greater than the cash payment made to bondholders.

Answer 16

Because the stated rate of interest is less than the effective interest rate when the bond is issued, this bond is issued at a discount. When the first interest payment is made, the discount is amortized. The discount amortization will increase interest expense for the period so that interest expense exceeds the interest payment to bondholders.