Chapter 5 - Leases, Liabilities, and Bonds

Question 0

Type of annuity when payments are made at the BEGINNING of each period

Answer 0

Annuity Due

Question 1

Type of annuity when payments are made at the END of each period

Answer 1

Ordinary Annuity

Question 2

Formula for Present Value of $1

Answer 2

(1+i)^-n

Question 3

Future Value of $1

Answer 3

(1+i)^n

Question 4

Present Value of an Ordinary Annuity

Answer 4

Payments * [(1-(1+i)^-n)/i]

Question 5

Future Value of an Ordinary Annuity

Answer 5

Payment * [((1+i)^n - 1)/i]

Question 6

How are leasehold improvements depreciated by the lessee?

Answer 6

Lesser of:

• Lease life
• Asset/improvement life

Question 7

How do lessors treat the depreciation of an asset?

Answer 7

Subtract depreciation from leasing income

Question 8

How are nonrefundable security deposits treated by lessor and lessee?

Answer 8

Lessor: Unearned Revenue
Lessee: Prepaid Rent Expense

Question 9

How are refundable security deposits treated by lessor and lessee?

Answer 9

Lessor: Liability
Lessee: Receivable

Question 10

Lessee Capital Lease Criteria (US GAAP)

Answer 10

Must meet one condition to capitalize “OWNS”
Ownership transfers at end of lease
Written option for bargain purchase
Ninety (90%) of leased asset FV s economic life is being committed in
lease term

Question 11

Lessee Finance Lease Criteria (IFRS)

Answer 11

"OWESFACS"
Ownership transfers
Written bargain purchase option
Economic life of asset (lease term covers majority)
Substantially all of FV of leased asset (PV of min. lease pmts)
Fluctuations of gains and losses
Ability to continue lease
Cancel lease
Specialized nature

Question 12

Lessor - Sales Type/Direct Financing Type Criteria (US GAAP)

Answer 12

“LUC”
Lessee “owns” leased property
Uncertainties don’t exist regarding the unreimbursable costs incurred
by lessor
Collectibility of lease payments can be reasonably predicted

Question 13

Profits recognized on Sale-Type Lease

Answer 13

• Gain from Sale

* Interest Income

Question 14

Profits recognized in Direct Financing Lease

Answer 14

Interest Income

Question 15

How does lessee record capitalization of lease?

Answer 15

Lesser of:

• FV of asset at inception of lease
• Cost = PV of min lease payments

Include (plus):

• Required payment
• Bargain Purchase Option
• Guaranteed Residual Value

Exclude (minus):

• Executory Costs
• Optional Buyout

Question 16

How are initial direct costs of lease paid by lessee affect the leased asset under IFRS?

Answer 16

Added to finance lease asset

Question 17

When calculating PV of min. lease pmts, lesses uses which interest rate?

Answer 17

Lesser of:

• Rate implicit in the lease (if known)
• Lessee’s incremental borrowing rate

Question 18

Capitalized Cost differences in OWNS

Answer 18

*Lower of this cost of market

O - PV of pmts + Required Buyout
W - PV of pmts + Bargain Buyout
N - PV of pmts
S - PV of pmts

Question 19

Depreciation Formula of Leased Assets

Answer 19

Capitalized Leased Assets

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Depreciable Base 
/ Periods of Benefits
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
Depreciation Expense (per period)

Question 20

Depreciation Period of Benefit Differences in OWNS (US GAAP)

Answer 20

O - asset’s useful life
W - asset’s useful life
N - lease life
S - lease life

Question 21

Depreciation Period of Benefit (IFRS)

Answer 21

Lesser of:

• Lease term
• Useful life

Question 22

Rule for Sales Type Lease

Answer 22

Cost + Profit = Selling Price

Selling Price = Present Value = FV

Question 23

Rules for Direct Financing Lease

Answer 23

PV = Carrying amount of receivable = Cost of asset sold

Question 24

Formula to calculate excess profit on Sale-Leaseback: * Operating Lease * Capital Lease

Answer 24

*Operating Lease Sale Price ``` _____________ Tentative Gain * ____________________ Excess Gain ``` * Capital Lease - Recorded amount of leaseback asset is lesser of: - FV of leased property - PV of min lease pmts

Question 25

Accounting by Lessee of Deferred Gains from Excess Profit of Sale-Lease-back (US GAAP)

Answer 25

PV of Rent pmts = __% FV of asset * Over 90% - Defer all gain and amortize with leased asset * 10-90% - Use rules. Defer up to PV of min. leaseback pmts (Operating Lease) or lower of PV of min. leaseback pmts or FV of asset (Capital Lease) * <10% - Recognize all gain or loss

Question 26

What is the difference between Real Economic Loss and Artificial Loss?

Answer 26

Real Economic Loss - FV < BV --> Recognized immediately Artificial Loss - Sale Price < FV --> Loss deferred and amortized over leaseback period

Question 27

Accounting of Sale-Leaseback by Seller/Lessee (IFRS) * Finance Lease * Operating Lease

Answer 27

* Finance Lease - defer and amortize over lease term * Operating Lease - Sale Price = FV --> Recognize immediately - Sale Price > FV --> Defer and amortize - Sale Price < FV --> Recognize immediately

Question 28

Sublease classification. * Operating Lease * Capital Lease

Answer 28

*Original Lease = Operating Lease = Operating Lease *Original Lease = Capital Lease O - Capital Lease W - Capital Lease N - Operating Lease S - Operating Lease

Question 29

How to calculate the FV of bond?

Answer 29

PV of future interest pmts at MARKET rate | + PV of principal at MARKET rate

Question 30

How does amortization of bond discount/premium affect interest expense?

Answer 30

Bond Discount - Increase interest expense | Bond Premium - Decrease interest expense

Question 31

How are bond issue costs treated differently for US GAAP and IFRS?

Answer 31

*US GAAP - Recorded as deferred charge (asset) - Amortized using straight line method *IFRS - Not recorded as separate asset; Bond issue costs deducted from carrying value of liability - Amortized using effective interest method

Question 32

What is the determination of periodic sinking fund payments?

Answer 32

FV of annuity of $1

Question 33

Calculation of gain or loss from extinguishment of debt

Answer 33

Reacquisition Price - Net Carrying Amount ______________________ (Gain) or loss ``` Face - Unamortized Discount + Unamortized Premium - Unamortized Bond Issue Costs (US GAAP) __________________________________________ Carrying Value ```

Question 34

What interest rate is used to calculate interest pmts? Stated interest or Market interest?

Answer 34

Market Interest Rate

Question 35

What interest rate is used to calculate pmt amounts? Stated interest or Market interest?

Answer 35

Stated Interest