Financial F5

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Financial F5
2011-06-21 20:06:22
operating capital lease bond present value annuity CPA Becker accounting

Leases, Liabilities, and Bonds
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  1. Ordinary annuity vs. annuity due
    • ordinary=payment at end of period
    • due=payment at beginning
    • PV of annuity due=ord+1
  2. lease bonus treatment
    asset that is amortized over the life of the lease SL
  3. treatment of leasehold improvements
    • in PP&E and capitalized over lesser of :
    • lease life
    • or
    • life of improvement
  4. Security deposits
    • non refundable=unearned rev amortized
    • refundable=receivable for lesee and L for lessor
  5. GAAP capital lease criteria for lessee
    • Ownership transfers at end of lease
    • Written option for bargain purchase
    • Ninety percent of leased property fair value<=PV of lease pmts
    • Seventy-five percent or more of assets economic life is being committed in lease term
  6. IFRS financing lease criteria
    • OWNS without the specific percentages and also
    • Fluctuations in fair value of residual accrue to lessee
    • Ability to continue lease again for substantially lower than market rate
    • Cancel of lease makes lessee bear loss
    • Specialized nature of assets so only lessee can use them
  7. criteria for sales-type or direct financing lease for lessor
    • Lessee "OWNS" leased property
    • Uncertainties don't exist regarding what to do with unreimbursable cost incurred by lessor
    • Collectibility of lease pmts is reasonably predictable
  8. Sales-type lease
    • when lease begins fair value of property does not equal lessor's carrying cost
    • lessor has gain on sale and interest income
  9. Direct financing lease
    • when lease begins, fair value of property is the same as the carrying cost
    • lessor only has interest income
  10. lessee's treatment of capital lease
    • A and L recorded at lesser of:
    • fair value at beginning of lease or
    • cost=PV of lease payments
  11. Lessee's A and L
    • include=required payments, PV of bargain purchase option, gauranteed residual value
    • exclude=executory costs, optional buyout that is not a bargain
  12. Interest rate used to discount pmts
    lesser of rate implicit in lease OR lessee's incremental borrowing rate
  13. depreciable life used by lessee GAAP
    • O=estimated economic life of asset
    • W=estimated economic life of asset
    • N=lease term
    • S=lease term
  14. depreciable life used by lessee IFRS
    lesser of lease term or useful life of asset
  15. formula for lessor's gross investment
    • lease payments
    • +ungauranteed residual value
    • gross investment
  16. formula for lessor's net investment
    • Gross investment
    • x PV rate
    • net investment
  17. formula for unearned interest revenue (contra lease receivable) for lessor
    • Gross investment
    • (net investment)
    • unearned interest revenue
  18. formula for COGS for lessor
    • Cost of A
    • (PV ungauranteed residual value)
    • COGS
  19. Profit/loss on sale-leaseback
    • fair value (sales price)
    • - book value
  20. excess gain on sale-leaseback operating
    amt of profit that exceeds PV of lease pmts

    • sale price
    • (NBV)
    • tentative gain
    • (PV of lease pmts) excess gain
  21. excess gain on sale-leaseback capital lease
    • sale price
    • (NBV)
    • tentative gain
    • (leaseback asset)
    • excess gain
  22. how is lessee's deferred gain determined?
    • 1. substantially all rights retained=PV of rent pmts>= 90% of the fair value of the property=major, defer all gain and amortize over leased asset
    • 2. less than substantial but greater than minor=PV of rent pmts between 10 and 90% of fair value of property=middle, defer gain up to PV of pmts, and recognize the rest.
    • 3. minor=PV of lease pmts<10% of fair value of property=minor, recognize all gain
  23. real economic loss
    if fair value of property<BV, recognize loss immediately
  24. artificial loss
    if sale price<fair value, defer loss and amortize over leaseback period
  25. amortizing deferred gain on leaseback
    capital leaseback=amortized in proportion to amortization of asset. deferred gain is unearned profit on sale-leaseback

    operating leaseback=deferred gain amortized in proportion to gross rental expense over life of lease. deferred gain is unearned profit on sale-leaseback
  26. IFRS sale-leaseback treatment
    • financial lease=profit deferred and amortized over lease term
    • operating lease=1. if sale price is same as fair value=no deferral 2. if sale price>fair value=profit deferred and amortized over time asset will be used 3. if sale price< fair value=g/l recognized immediately. (pg. 28)
  27. treatment of sublease if original lease was operating
    sublease is operating
  28. treatment of sublease if original is capital
    • O or W capital=sublease is capital
    • N or S capital=sublease is operating unless it meets a capital lease requirement
  29. when to recognize asset retirement obligation
    when it meets definition of a liability
  30. initial recording of ARO
    • when reasonable estimate can be made
    • PV of future liability

    • journal entry
    • D to A retirement cost (asset)
    • C to A retirement obligation (liability)
  31. accretion of ARO
    add to liability to adjust it's PV up and eliminate discount that it was recorded at

    • journal entry
    • D to accretion expense
    • C to ARO (increase liability)
  32. Depreciation of asset retirement cost
    reduce carrying value of ARC down to zero throughout accretion period

    • journal entry
    • D to depreciation expense
    • C to accumulated depreciation (reduce asset)
  33. ARO formula
    cumulative accretion expense+cumulative depreciation expense=total undiscounted ARO
  34. revise ARO cash flows
    • increase undiscounted cash flows=new liability, use current discount rate
    • decrease undiscounted cash flows=remove old liability, use historical or weighted average discount rate
  35. environment obligations
    • liability related to polution (ex. BP oil spill)
    • treated like ARO
    • accrue for liability if 1. impaired asset/liability incurred at date of financial statements 2. loss can be reasonably estimated
  36. debentures
    unsecured bonds
  37. term bonds
    • single fixed maturity
    • all principal paid at end of term
  38. serial bonds
    • pre-numbered
    • issuer can call and redeem by serial number
  39. fair value of a bond
    • PV of future interest pmts at market rate
    • PV of principle at market rate
  40. bond issued at discount
    • coupon rate<market (effective) rate
    • amortization icnreases interest expense

    • journal entry for issuer
    • D to cash
    • D to discount on bond payable (contra acct to bonds payable)
    • C to bond payable

    • journal entry for investor
    • D to investment in bond
    • C to cash
  41. bond issued at premium
    • coupon rate>market (effective) rate
    • amortization decreases interest expense

    • journal entry for issuer
    • D to cash
    • C to premium on bond payable (direct addition to bond payable)
    • C to bond payable

    • journal entry for investor
    • D to investment in bonds
    • C to cash
  42. bond issue costs
    • GAAP=deferred charge (asset), amortize using SL
    • IFRS=deduct from carrying value of liability and amortize using effective interest method
  43. amortizing bond discounts or premiums
    • 2 ways-straight line or effective interest method
    • amortization period=time bonds are outstanding, GAAP=contractual life of bond, IFRS=expected life of bond
  44. SL amortization of bond discount or premium
    not GAAP but allowed if not materially different from effective interest method

    premium or discount/# periods bond outstanding=amortization per period
  45. bond interest expense formula SL
    interest expense=coupon - premium OR + discount amortization
  46. journal entry for SL amortization of disount
    • issuer
    • D to bond interest expense
    • C to disount on bond payable (for amortization amt)
    • C to cash (for coupon)

    • investor
    • D to cash (for coupon)
    • D to investment in bonds (for amortization amt)
    • C to bond interest revenue
  47. effective interest (constant yield) method amortization of bond discount/premium
    • required by both GAAP and IFRS
    • results in a constant RATE of interest each period but different amounts
  48. bond interest expense formula for effective interest method
    interest expense=carrying value at BEGINNING of period*effective interest rate
  49. amortization of discount/premium amount with effective interest method
    • amortization of discount=interest expense-coupon paid
    • amortization of premium=coupon paid-interest expense
  50. journal entry for effective interest method amortization of premium
    • issuer
    • D to bond interest expense
    • D to premium on bond payable (for amortization amt)
    • C to cash (for coupon)
  51. bonds issued between interest dates
    accrued interest added to price of bond
  52. year end bond interest accrual
    • issuer adjusts books at year end for accrued interest
    • pro rata share of discount or premium as well

    • journal entry
    • D to interest expense (coupon)
    • C to interest payable (coupon)
    • D to interest expense (discount amortization)
    • C to discount on bonds payable (discount amortization)
  53. convertable bonds treatment
    • sold at more than face value because of conversion feature
    • GAAP=all issue price allocated to bonds because conversion feature is hard to value
    • IFRS=bonds at fair value excess goes to equity
  54. book value method recording convertable bonds
    • GAAP required
    • no I/S impact, only c/s and APIC