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CPA > FAR - Becker F5 > Flashcards

FAR - Becker F5 Flashcards

1
Q

Present value of $1 is:

A

The amount that must be invested now at a specific interest rate so that $1 can be paid or received in the future. Lower than $1

Examples:

  • (Capital lease buyout (at the end of lease)
  • (Bond principal payoff at the end of term)
  • (US savings bond)
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2
Q

Future value of $1 is:

A

Compound interest

It is the amount that would accumulate at a future point in time if $1 were invested now. Greater than $1.

Example:
- bank savings account

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3
Q

Present value of an ordinary annuity is:

A

The current worth of a series of identical periodic payments to be made in the future

Example:

  • periodic lease and bond payments
  • lottery winning
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4
Q

Future value of an ordinary annuity is :

A

The sum to be received at some point in the future of identical periodic investments made from the present until they future point

Example:

  • investing in an IRA
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5
Q

Present and future value of an annuity due is:

A

Only difference between annuity due and ordinary annuity is: timing of payments.

So, adding 1.00 (year/period) to the present value of an ordinary annuity of 1 for n periods

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6
Q

What are the 6 separate types of present value concepts?

A
  1. Present value of $1
  2. Future value of $1
    (What’s a dollar grow or shrink to)
  3. Present value of an ordinary annuity
  4. Future value of an ordinary an unity
    (End of the year payments)
    (Series of payments)
    (In arrears)
  5. Present value of an annuity due
  6. Future value of an annuity due
    (Payment begins beginning of the year)
    (Series of payments)
    (Starts now)
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7
Q

Operating lease (US GAAP/IFRS) is

A

Lessee having the privilege of operating the asset

  • no ownership
  • rental agreement
  • return at the end
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8
Q

Lessor vs lessee types for capital lease are:

A

Lessee:

  • US GAAP (capital lease)
  • IFRS (finance lease)

lessor:

  • US GAAP ( sales-type OR direct financing type)
  • IFRS ( finance lease)
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9
Q

Lessee accounting for operating expense J/E:

A

Record rent over the lease term, usually straight line

DR - Rent Expense
CR - Cash/Rent payable

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10
Q

Lease bonus ( prepayment) for future expense should be classified as an asset (deferred charges) and:

A

Amortized using the straight line method over the life of the lease

Example:
- commission paid to real estate agent

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11
Q

Lessor accounting for operating lease J/E:

A

DR - Cash/Rent receivable

  CR - Rental income
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12
Q

US GAAP and Tax rule differences for prepaid rent income:

A

US GAAP - report prepaid rental income when earned

TAX RULE - report prepaid rental income when received

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13
Q

If a rental agreement includes free rent, then the calculation would be:

A

Total amount of the lease - amount of free months/ to length of lease

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14
Q

How is capital lease treated?

A
  1. As you are making the payments for the lease and it becomes yours at the end

OR

  1. Or you should ought to treat it like it’s yours
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15
Q

Capital/finance lease is:

A

Purchase/ownership

  • lessee assumes all risk and benefits
  • present value
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16
Q

Sales type finance lease results in:

A

In a dealer’s or manufacturer’s profit or loss to the lessor

If all conditions are met:

  1. Lessee “owns” the leased property (meets any of the four OWNS criteria)
  2. Uncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
  3. Collect ability of the lease payments is reasonably predictable

NOTE: if all met, then lessor can claim
It was sold

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17
Q

Direct financing capital lease DOES NOT:

A

Result in a dealer’s or manufacturer’s profit or loss

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18
Q

If a capital lease mets 1 out of the 4 conditions of lease classification O.W.N.S, then journalize lessee as:

A

Lessee:

DR- fixed asset leased property
CR - obligation under capital lease

  • record at the lower of:
  • FV of the asset at the inception of the lease

Or

-cost = present value of the minimum lessee payments
(Required payments, bargain purchase options, guaranteed residual value) less (executory costs, maintenance, repairs, and options buyout)

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19
Q

GAAP capital lease OWNS stands for:

Applies to
Lessee

A

Owner ship transfers at the end of lease (upon final payment or
Required buyout)

Written option for bargain price

Ninety (90%) of leased property FV less than or equal to PV lease payments

Seventy-five (75%) or more of asset economic life is being committed in the lease term

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20
Q

IFRS finance lease classifications:

Mnemonics - OWES FACS

Applies to lessee

A
  • the lease transfers ownership of the asset to the lessee by the end of the lease term
  • the lease contains a written bargain purchase option
  • the lease term is for the major part of the economic life of the asset even if title is not transferred
  • the present value of the minimum lease payment amounts to at lease substantially all of the fair value of the leased asset
  • gains and losses from the fluctuation in the FV of the residual accrue to the lessee
  • the lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than market rent
  • the lessee can cancel the lease and the lessor’s losses associated with the cancellation are borne by the lessee
  • the leased assets are of such a specialized nature that only the lessee can use them without modification
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21
Q

Sale type lease have 2 profits and direct financing has 1:

A
  1. Gain on sale
  2. Interest income

Direct
1. Interest income

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22
Q

What interest rate should be used when calculating the present value of the minimum lease payments:

A

The lower of the:

  1. Rate implicit in the lease (if known)
  2. Lessee’S incremental borrowing rate (the rate available in the market to the lessee (not prime))
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23
Q

US GAAP, Capitalized

Cost for OWNS and its depreciation rules:

A

O = PV of payments + required buyout (if any)

W = PV of payments and bargain buyout

N = PV of payments (not optional buyout)

S = PV of payments (not optional buyout)

Depreciation Rule:
O & W = depreciate over asset life
N & S = depreciate over lease life

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24
Q

IFRS depreciation rule for lessee:

A

The lesser of the lease term or the useful life of the asset

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25
Q

First payment of an annuity due is:

A

All

Principal

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26
Q

Recoding a sales type(finance) capital lease:

A
  1. Minimum lease payment(plus any bargain purchase) + unguaranteed residual value(estimated FV at end) is = lease payment receivable (also the gross investment)
  2. Net investments= gross investment x PV
  3. Unearned interest revenue (future interest) = gross investment - net investment
  4. COGS = cost of asset - PV unguaranteed residual value
  5. Sales revenue = cost + profit
    (When sales price not given)

DR - lease payments receivable
CR - unearned interest income
CR - sales revenue

DR - COGS
CR - inventory( asset sold)

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27
Q

Recording a direct financing capital lease:

A
  1. Minimum lease payment(plus any bargain purchase) + unguaranteed residual value(estimated FV at end) is = lease payment receivable (also the gross investment)
  2. Net investments= gross investment x PV
  3. Unearned interest revenue (future interest) = gross investment - net investment

DR- lease payments receivable
CR - unearned interest revenue
CR - Asset

(No sale and no COGS)

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28
Q

Sale-leaseback general rule:

A
  • over 90% = loan
  • 10% to 90% = rules
  • 0% to 10% = ignore

If sale at a gain and lease back, defer he gains

If sale at loss and lease back, recognize loss immediately

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29
Q

Excess profit on sale leaseback calculations:

A
  1. Operating lease excess profit (rent back)

Sale price - asset NBV = tentative gain

Tentative gain - PV min lease payments = excess gain

  1. Capital lease excess profit (OWNS back)

Sale price - asset NBV = tentative gain

Tentative gain - leaseback asset = asset gain

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30
Q

Defer all sale leaseback gains and amortize it:

Over 90%

A

Over the leased asset

PV of rent payments Over 90% of FV of the property
Substantially all rights retained

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31
Q

PV of rent payments less than 90% of FV, but greater than 10% of the property is:

A

Rights retained are less than “substantially all” but greater than “minor”

  • defer gain up the the PV of the min leaseback payments (operating lease) or capitalized asset (capital lease). Gain in excess of this amount is recognized immediately
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32
Q

PV of rent payments less than 10% of FV of the property is:

A

Gains are not deferred, recognize immediately

Unless, the sell price is below the FV, in which the loss is deferred and amortized over the leaseback period

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33
Q

Under US GAAP, Amortization of deferred gain are amortized how per operating and capital?

A

Operating- amortized in proportion to the gross rental expense over the life of the lessee

1) deferred gain or loss would be recognized as an “unearned profit (loss) on sale leaseback.
2) the “unearned profit (loss) on sale leaseback” would be treated as a deferred credit (debit) in B/S

Capital - amortized in proportion to the amortization of the leased asset

1) deferred gain or loss would be recognized as an “unearned profit (loss) on sale leaseback.
2) the “unearned profit (loss) on sale leaseback” would be treated as a valuation account of the leased (back) asset

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34
Q

Under IFRS, Amortization of deferred gain are amortized how per operating and capital?

A

Finance (capital) lease - any profit from the sale leaseback transaction is deferred and amortized if the lease term

Operating - profit or loss from a sale leaseback is recognized based on the leased asset’s CV, FV, and selling price

1) if sales price = FV, then any profit and loss is recognized immediately
2) if sale price > FV, then profit should be deferred and amortized over the period that the asset is expected to be used

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35
Q

If an original lease was a operating lease, then the sublease is a:

A

Operating lease

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36
Q

If a capital lease was the original lease, then the sublease is:

A

If original lease met O & W, then the sublease is a capital lease

If original lease met N & S, then the sublease is an operating lease

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37
Q

The fair value of the equipment is equal to the present value of the future cash flows:

A

PV = annual rents x annuity due PV Factor

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38
Q

Rental income is recorded when it is earned, not when received, therefore the total rental income should be recognized over the:

A

Number of rental years

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39
Q

Bond indenture is:

A

The document that describes the contract between the issuer (borrower) and bond holders (lenders)

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40
Q

Face (par) value is:

A

The total dollar amount of the bond and the basis on which periodic interest is paid.

Bonds are issued at face (par) value when the states rate equals the market rate

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41
Q

Stated (nominal or coupon) interest rate is:

A

The stated interest rate, also known as the nominal interest rate or the coupon rate, is the interest to be paid to the investors.

The rate is specified in the bond contract.

NOT EQUAL TO MARKET RATE!!

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42
Q

Market (effective) interest rate is:

A

The rate of interest actually earned by the bond holder and is the rate of return for comparable contracts on the date the bonds are issued

Caused by premium/discount

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43
Q

Bond discount is:

A

The market rate is higher than the states rate

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44
Q

Collateral trust bonds are:

A

Secured bonds

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45
Q

Convertible bonds are:

A

Are convertible into common stock of the debtor at the option of the bond holder

1) nondetachable warrants - convo bonds must be converted into capital stock
2) detachable warrants - the convo bond is not surrendered upon conversion, only the warrants plus cash representing the exercise price of the warrants. The warrants can be bought and sold separately from the bonds

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46
Q

Participating bonds are:

A

Bonds that not only have a stated rate of interest but participate in income if certain earnings levels are obtained

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47
Q

Term bonds are:

A

Bonds that have a single fixed maturity date. The entire principal is paid at the end of this term/period

48
Q

Series bonds are:

A

Pre-numbered bonds that the issuer may call and redeem a portion by serial number (often redeemed pro rata annually/in a series of annual installments)

49
Q

Income bonds are:

A

Bonds that only pay interest if certain income objectives are met

50
Q

Zero coupon bonds are:

A

Also known as “deep discount bonds” are bonds sold with no stated interest but rather at a discount and redeemed at the face value without periodic interest payments

51
Q

Commodity backed bonds are:

A

Also know as “asset-linked bonds” are bonds that are redeemable either in cash or a states volume of a commodity, whichever is greater

52
Q

Bonds payable should be recorded as a:

A

Long term liability at FV and adjusted to the present value of their future cash flows by either subtracting unamortized discounts or adding unamortized premiums

53
Q

Bonds payable are recorded at the true present value at the date of issuance based on the market (effective) interest rate at that date.

Bond identifications/fundamentals :

A
  1. Usually in denominations of $1,000
  2. Price is always quotes in 100s (% of par value)
  3. Indenture is a contract for purchase of bond
  4. Coupon rate = the states interest rate on the bond
  5. Bond interest (check amount) = coupon x face. Bonds generally pay interest semiannually in the US and annually in other countries
  6. Principal payoff is always the full face amount
  7. Premium/discount is the result of buyer and seller “adjusting” the coupon rate to the prevailing market rate of interest
54
Q

FV bond =

A
  1. PV of future interest payments (market value)

And

  1. PV of principal (at market value)
55
Q

If issued/stated rate of the bond is less than the market rate of the bond, we have a :

A

Bond Discount

56
Q

The amount of cash recorded by a bond holder at regular interest payment intervals throughout the life of the bonds will ALWAYS be at the:

A

Stated rate x face amount of the bond

57
Q

The unamortized discount on bonds payable is a contra account to bonds payable, which means:

A

That it is presented on the balance sheet as a direct reduction from the face (par) value of the bonds to arrive at the bond’s carrying value at any particular point in time

58
Q

The unamortized premium on bonds payable, is:

A

That it is presented on the balance sheet as a direct addition to the face (par) value of the bonds to arrive at the bond’s carrying value at any particular point in time

59
Q

Bond issue costs are:

A

Transaction costs of the bonds issue

Examples:

  • legal fees
  • accounting fees
  • underwriting commissions
  • printing

Recorded as a deferred charge (an asset) and amortized from the date of issue of the bonds into expense using straight line method

60
Q

Under IFRS, bond issue costs are NOT recorded as a separate asset, they are:

A

Deducted from the CV of the liability and amortized using the effective interest method

61
Q

Methods of discount and premium amortization:

A
  1. Straight line method

2. Effective interest method (also, constant yield method)

62
Q

Straight line method for discount and premium is not permitted under?

A

IFRS , only

Use effective interest method

63
Q

Interest expense for bonds =

A

Interest expense = (FV x stated interest rate) - premium amortization or + discount amortization

64
Q

Effective interest method =

A
  1. Effective interest method (also, constant yield method) =

CV at BEG of period x effective interest rate
(Income statement - interest expense)

FV x stated interest rate(coupon rate)
(Balance sheet - interest paid)

The 2 numbers above are subtracted to get AMORTIZATION

65
Q

Straight line method for bond discount and bond premium amortization is:

A

Premium or discount / # of periods bond is outstanding = periodic amortization

  1. Add discount amortization to FV x stated rate
  2. Subtract premium amortization from FV x states rate
66
Q

Effective interest method amortization will have different:

A

Dollar amounts of interest expense each period

NOTE: straight line will have the same amount every period

67
Q

Rule of thumb for bond amortization is:

A

Amortize

Towards the face value of the bond

68
Q

Bond issued between interest dates have to do what with the accrued interest?

A

The amount of interest that had accrued since the last interest payment is ADDED to the price of the bond

The purchaser pays such interest and is reimbursed at the next payment date upon receipt of a full period’s interest

J/E: seller

DR - Cash
DR - Discount on bond payable
CR - Bonds payable
CR - Bond int exp/payable (the accrued int)

J/E : 1st interest payment (reverse previous int)

DR - Bond interest exp/payable
CR - Cash

69
Q

When the date of a scheduled bond interest payment and the issuer’s year end DOES NOT agree, it is necessary to accrue interest by an adjusting entry. Year end accrual adjustments would be:

A

For accrued interest:

DR - Interest expense
CR - interest payable

For discount amortization

DR - interest expense
CR - discount on bonds payable

70
Q

A bond sinking fund is:

A

A trustee fund (restricted cash) pursuant to the indenture wherein the company contributes money each year so that at maturity, there is a sum available to repay the entire liability

71
Q

A bond sinking fund is generally:

A

a non-current (restricted) asset on the financial statements of the issuer.

It is a current asset only to the extent that it offsets a current liability

72
Q

A bond sinking fund is merely an appropriation of:

A

Retained earnings to indicate to the shareholders that certain retained earnings are being accumulated for bond sinking fund purposes

73
Q

To determine the periodic payments to be made into a sinking fund, the _________ is used?

A

The future value of an annuity of $1 at an assumed rate

DR - bond sinking fund
CR - Cash

To record interest
DR - bond sinking fund
CR - interest revenue

74
Q

Serial bonds are an alternative to using sinking funds:

A
  • serial bonds have principals that mature in installments. These bonds allow the issuer to match maturity dates with the organization’s cash flow requirements.
75
Q

How do serial bonds work?

A

The interest is paid on the principal amounts. Once interest is paid, then the principal amount gets paid and the interest is recalculated.

Example

1,000,000 get interest then pay principal 200,000

Principal is now 800,000, get interest than pay principal another 200,000 and so forth

76
Q

Amortization methods on serial bond are:

A
  1. Effective interest method

2. Bonds outstanding method

77
Q

Bond outstanding method is:

A

Like sum of the year’s digits

Example. 1,000,000 of 10% for 5 years, bonds of $100,000 mature semi annually

= 10 periods

1,000,000 + 900,000 + 800,000………+ 100,000 = 5,500,000, which becomes the denominator

78
Q

Convertible bonds are often issues at:

A

MORE than face value, because of the value of the conversion feature.

79
Q

Convertible bonds (nondetachable), under US GAAP and IFRS:

A

US GAAP- the issuance price is allocated to the bonds with no recognition of the conversion feature because it is difficult to assign a specific value to the conversion feature

IFRS- both a liability (bond) and an equity component (conversion feature) should be recognized when convertible bonds are issued. The bond liability should be 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. This is similar to the accounting for bonds with detachable warrants

EVERYTHING GOES TO BOND AT ISSUE

80
Q

The conversion of the bonds to stock may be recorded under either:

A

The book value method (US GAAP)

Or

The market value method (not GAAP, but tested on the exam)

81
Q

Conversion bond, book value method is:

A

No gain or loss is recognized ( no I/S impact)

  • at conversion, the bond payable and related premium or discount are written off and common stock is credited at (par)
  • APIC is credited for the excess of the bond’s CV over the stock’s par value less and conversion costs

Summary, upon conversion, issue must:
1. Pay the accrued interest up to the conversion date

  1. Amortize the bond discount or premium up to the conversion date
  2. Amortize the bond issue costs up to the conversion date
  3. Record any difference as APIC
82
Q

Conversion bond, market value method is:

A

Recognized gain or loss

  • it views the conversion as culmination of the earnings process (income statement impact)
  • at conversion, the bonds payable and related premium are written off, and common stock is credited (at par). The credit to APIC is the excess of the market price of the stock over par value
  • the difference between the market value of the stock and the book value of the bonds is a recognized gain or loss on redemption
83
Q

Bonds sold with detachable stock purchase warrants are:

A

Option contracts that are issued with, and detachable from, bonds (and notes).

The warrant gives the bond holders the right to buy stock at a fixed price within a specific time period.

Because they are detachable, the warrants are traded separately and are considered to be a separate financial instrument

84
Q

The value assigned to a separate conversion feature for a detachable warrant is:

A

Relative FV at the time of issue

The amount is credited to APIC- Warrants

J/E:at issued date

DR - CASH
CR - Bonds Payable
CR - APIC - Warrants

NOTE : at issue date, allocate bond proceeds to 1) bond has value 2) warrants have value

85
Q

Bonds with detachable warrants can use use two different methods to record:

A
  1. Warrants only method (only if fair value of the warrant is known)
  2. Market value method (use if the FV of both the warrants and bonds are known)
86
Q

General steps to account for bonds issued with detachable stock purchase warrants:

A
  1. Separate the warrants from the debt at the date of issuance of the bonds
  2. Generally, allocate the amount received upon issuance separately to debt and to the detachable warrants according to their relative fair values at the date of issuance (using market value method)
  3. The amount that is allocated to warrants is credited to an account called “ APIC - Warrants
  4. Different between the amount allocated to the bonds and the face value of the bonds should be devoted or credited to discount or premium on bonds payable
  5. Exercise of the warrants

DR - Cash
DR - APIC - Warrants
CR - common stock (at par)
CR - APIC

NOTE: NO BOND IMPACT

87
Q

Gain or loss on bond extinguishment before maturity requires adjustments for:

A
  1. Bond issue costs reported as an asset under US GAAP
  2. Any related unamortized discount or premium
  3. The difference between the bond’s face value and the reacquistion proceeds
88
Q

Gain or loss on bond reacquistion calculation:

A

= reacquistion - carrying value

(Reacquistion CV = loss)

Reacquistion = face x % paid

CV = face - unamortized discount + unamortized premium - unamortized issue cost reported as an asset

NOTE: gain or loss will go into income from continuing operations

89
Q

If interest rates increase, then what happens bonds interest rate?

A

Bonds would look less attractive and the market value would decrease.

90
Q

Interest expense for a bond is recognized:

A

For the entire period from bond issuance through the fiscal year end

91
Q

When using effective interest method for bonds, DO NOT include accrued interest as a part of the:

A

Interest revenue calculation

CV beg X effective interest rate

92
Q

Bond sinking funds are accounted for in their own account including:

A

Investments + revenues - expenses

Balance 
\+ investment 
\+ dividend revenue 
\+ interest revenue 
- administration cost
93
Q

At the time the bond warrants are exercised, total shareholders equity is:

A

Increased by the cash received upon existence of the warrants, but not by the carrying amount of warrants

94
Q

At the date of issuance, paid in capital was:

A

Increased by the amount allocated to warrants, which became the carrying amount of warrants

95
Q

Serial bonds are redeemed pro-rata over the life of the issue and would include:

A
  • registered bonds MATURING ANNUALLY

- commodity backs bonds MATURING ANNUALLY

96
Q

Debenture bonds are unsecured bonds and would include:

A
  • registered bonds

- convertible bonds

97
Q

Only sinking fund accounts ( or the portion thereof) that are considered to offset current bond liabilities can be included:

A

within current assets

98
Q

Interest expense is calculated from the date the bond is :

A

ISSUED

99
Q

How is interest interest expense and interest payable calculated for a bond?

A

Interest expense = CV x market rate

Interest payable = face value x stated rate

100
Q

Bond interest expense - bond interest payable =

A

Premium amortization if positive

Discount amortization if negative

101
Q

Interest rate on convertible debt is generally LOWER THAN nonconvertible debt because of the value of the conversion feature? T/F?

A

True

102
Q

The conversion price is generally GREATER than the market value of the common stock at the time of issuance? T/F?

A

True

103
Q

Pension plan interest is reported as a component of:

A

Net periodic pension cost

104
Q

Deferred compensation plan interest is reported as a component of:

A

Deferred compensation plan expense

105
Q

Interest incurred to finance software developed for INTERNAL USE is capitalized as a component of:

A

Computer software development costs

106
Q

When using book value method for conversion of bonds to stock, the stock is recorded at:

A

The carrying value of the bonds

CV - unamortized discount + unamortized premium

107
Q

When a bond is issued with a stated rate of interest LESS THAN the effective interest rate, it is issued at a:

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 bond holders

108
Q

Serial bonds are bonds:

A

That mature In Installments

109
Q

Debentures are unsecured:

A

Corporate bonds

110
Q

Term bonds are:

A

Bonds that have a single fixed maturity date

111
Q

The conversion feature of convertible bonds CANNOT be:

A

Separately traded

112
Q

The conversion feature is recognized as a component of equity under IFRS, but not for US GAAP ? T/F?

A

True

113
Q

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?

A

Price

The issue price of a bond is a function of 2 different cash flows.

1) a lump sum
2) other regular stream of payments

114
Q

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:

A

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

115
Q

Bond issue costs are booked as an asset under US GAAP, but not under IFRS? T/F?

A

True

CPA (15 decks)

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