F6

Question 1

Lease contract criteria

Answer 1

1. Contract depends on an identifiable asset which the lessor cannot substitute another similar asset
2. Contract must convey the right to control the use the asset over the lease term solely to lessee

Question 2

Sales-type lease criteria

Answer 2

At least 1 of these criteria must be met:
Ownership transfers to lessee by end of lease term.
Lessee has a written option to purchase asset and is very likely to exercise.
Present value of lease payments >= FV of asset.
Lease term is at least 75% of remaining life of asset.
Asset has no alternative use at end of lease term.

Question 3

Direct financing lease criteria

Answer 3

No sales-type lease criteria are met.
Both of the following must be met:
Present value of lease payments + 3rd party and lessee residual value substantially exceeds assets fair value.
Collection of the lease payments is probable.

Question 4

Things to include in calculation of lease payments

Answer 4

Contractual fixed payments
Exercise price option
Purchase price at lease end
Rate variable payments (No changes to lease value)
Residual guarantees likely to be owed
Termination penalties reasonably assured

Question 5

Commencement date for a lease

Answer 5

The date for which the lessor makes the underlying asset available to the lessee for use, and the lease term begins.

Question 6

When amortizing an operating lease, _______ remains constant each year. When amortizing a finance lease, _______ remains constant each year.

Answer 6

Total Lease Expense;

Amortization Expense

Question 7

Determining leased asset amortization

Answer 7

Amortize over Useful Life if: ownership or written option criteria are met
Amortize over shorter of lease term or useful life if: NPV, economic life, or specialized asset are met.

Question 8

Derivative instrument

Answer 8

Derives its value from some other instrument.
Has one or more underlying (specified price or rate)
Has one or more notional amount (specified unit of measure).
Does not require an initial net investment or requires a smaller one than other similar contracts.
Terms require a settlement of cash or other asset.

Question 9

Call option vs Put option

Answer 9

Call option- gives option holder the right to buy from the writer at a specified price during a specified period of time.
Put option- gives holder the right to sell to the option writer at a specified price during a specified period of time

Question 10

Market risk

Answer 10

The risk that an entity will incur a loss on a derivative contract

Question 11

Credit risk

Answer 11

The risk that the other party in the derivative contract will not perform according to terms of contract

Question 12

Futures/Forwards Contracts

Answer 12

An agreement between two parties to exchange a commodity, currency, or other asset at a specified price.
Futures - public companies
Forwards- private agreements

Question 13

Swap Contract

Answer 13

A private agreement between two parties to exchange future cash payments

Question 14

Functional currency criteria

Answer 14

The operations are relatively self-contained and integrated in the country.
The day to day operations do not depend on the parent’s functional currency.
The local economy of the sub is not highly inflationary, or having cumulative inflation >=100% in 3 years.

Question 15

Cumulative foreign translation loss would be classified as a _____________

Answer 15

Contra-equity account,

Debit to AOCI

Question 16

Remeasurement method exchange rates used

Answer 16

Current rate: Balance sheet monetary items
Historical rate: Balance sheet non-monetary items, Depreciation/ Amortization expense, COGS,
Average rate: All remaining income statement items not measured historical rate

Question 17

Translation method exchange rates used

Answer 17

Current rate: Assets and Liabilities
Average rate: Income Statement items
Historical rate: Common Stock and APIC

Question 18

Permanent tax differences

Answer 18

Impact current taxes but not deferred taxes.
Revenues/expenses that enter into pretax financial income but never into taxable income, or vice versa.
Non-taxable or non-deductible items

Question 19

Temporary tax differences

Answer 19

Impact current and deferred taxes.

Revenues/expenses that enter into pretax GAAP in a different period than they enter taxable income.

Question 20

Deferred tax asset

Answer 20

Revenues/gains are included in taxable income before financial accounting income. (Ex. Prepaid rent)
Expenses/losses are included in financial accounting income before taxable income. (Ex. Bad debt expense, estimated warranty, start-up expenses)

Question 21

Deferred tax liability

Answer 21

Revenues/gains included in financial accounting income before taxable income. (Ex. Installment sales, equity method dividends)
Expenses/losses included in taxable income before financial accounting income. (Ex. Depreciation/Amortization)

Question 22

Primary objective of accounting for income taxes

Answer 22

To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax consequences

Question 23

Operating Loss Carryforward amount

Answer 23

An operating loss carryforward from a prior year can be recognized as a current income tax benefit, can reduce up to 80% of taxable income. The amount in excess of this limit can be carried forward to future years

Question 24

Valuation Allowance

Answer 24

Recognized when it is more likely than not that part or all of a deferred tax asset will not be realized.
DR Income Tax Expense
CR Valuation Allowance