F5

Question 1

Present Value Formula

Answer 1

PV = FV x PV Factor

Question 2

How are bond issuance costs treated?

Answer 2

They are capitalized and must be proportionately removed for any amount of debt that is retired or extinguished early

Question 3

How are bond issuance costs treated under IFRS?

Answer 3

*they decrease both cash and the carrying amount of the bond (through the discount or premium)

Question 4

Shortcut to find payable or note amount when annuity is an annuity due

Answer 4

• minus one from n and use n-1 periods under the ordinary annuity rate
• add one to the PV factor of an ordinary annuity to compute the amount of the annuity due

Question 5

Operating Lease: Lessee Rent Expense

Answer 5

*expensed over the lease term

Question 6

Operating Lease: Lessee Bonus

Answer 6

*prepaid expense and amortized over the life of the lease

Question 7

Operating Lease: Lessee Leasehold Improvements

Answer 7

*capitalize over the lesser of the useful life or lease life

Question 8

Operating Lease: Rent Kicker

Answer 8

*period expense

Question 9

Operating Lease: Lessee Refundable Security Deposit

Answer 9

*reported as an asset

Question 10

Operating Lease: Lessor Rental Income

Answer 10

*over the life of the lease

Question 11

Operating Lease: Lessor Fixed Asset

Answer 11

*keep asset on books and depreciates it normally

Question 12

Operating Lease: Lessor Nonrefundable Security Deposit

Answer 12

*recorded as unearned revenue until it is deemed earned; doesn’t matter how many deposits are estimated to be kept; revenue from deposits cannot be estimated and recognized in this manner

Question 13

Operating Lease: Lessor Lease Bonus

Answer 13

*recorded as unearned income and earned over the life of the lease on a straight-line basis

Question 14

What expense should be included in calculating operating lessor income?

Answer 14

*depreciation expense

Question 15

Lessee Capital Lease Criteria

Answer 15

O wnership transfers at the end of the lease
W ritten option for bargain purchase
N inety percent of the leased property FV s useful life

Question 16

Lessor Capital Lease Criteria

Answer 16

L essee meets the capital lease criteria
U ncertainties do not exist as to unreimbursed expenses
C ollectibility is reasonably predictable

Question 17

IFRS Finance Lease Criteria

Answer 17

O wnership
W ritten bargain purchase 
E conomic life (major)
S ubstantially all of the fair value
F luctuation gains and losses accrue to lessee
A bility to continue the lease 
C an be canceled by the lessee
S pecialized nature of the assets involved in the lease

Question 18

Sales Type vs Direct Financing Lease

Answer 18

Sales Type = record profit from sale and rental income

Direct Financing Lease = only record rental income

Question 19

Executory Cost Treatment

Answer 19

• not included in the PV of the minimum payments

* period expense

Question 20

Initial direct costs of the lease paid by lessee: treatment by IFRS

Answer 20

*capitalized to the asset which may cause it to carry at a higher value than the corresponding liability

Question 21

Items included in determining minimum lease payments

Answer 21

• periodic payments
• GUARANTEED residual value
• bargain purchase option (payment amount)

Question 22

Depreciation Period for Lessee Under Capital Lease

Answer 22

O & W = economic life of asset

N & S = life of the lease (ONLY)

Question 23

Depreciation Period for Lessee under Capital Lease - IFRS

Answer 23

*shorter of lease or economic life of the asset

Question 24

Special Disclosure Rule under GAAP for Leases

Answer 24

FIVE YEAR RULE: show a period of at least the next five payments whether it is a capital lease or an operating lease

Question 25

Sales-Type Lease for Lessor

Answer 25

Gross Investment (lease receivable) Lease Payment +unguaranteed residual value = gross investment Net Investment Gross Investment x PV = net investment Unearned Interest Revenue (contra-lease receivable) Gross investment - net investment = unearned interest revenue COGS COGS - PV of unguaranteed residual value (get it back) = COGS

Question 26

Sales Revenue Rule for Sales-Type Lease

Answer 26

Cost + Profit = Selling Price = FV = PV

Question 27

PV = __________ in Sales-Type Lease

Answer 27

= Sales Revenue / Selling Price

Question 28

Direct Financing Lease for Lessor

Answer 28

*same as Sales-Type except no revenue or COGS Gross investment (lease receivable) Lease Payments + Unguaranteed residual value Net Investment PV of Gross Investment Unearned Interest Revenue Gross investment - Net Investment

Question 29

PV = ____________ in Direct Financing Lease

Answer 29

= Asset

Question 30

Rule for PV of Direct Financing Lease

Answer 30

PV = Carrying amount of receivable = cost of the asset

Question 31

Amount of Deferred Gain for Sale-Leasebacks

Answer 31

1. Substantially All Rights Retained (PV >= 90% of FV of property) = DEFER ALL GAIN 2. Middle (10% - 90%) = DEFER GAIN IN EXCESS OF PV 3. Minor (< 10%) = RECOGNIZE ALL GAIN *compare PV to FAIR VALUE (SALES PRICE) of property

Question 32

When do you recognize losses on Sale-Leasebacks?

Answer 32

Immediately

Question 33

Two Times Gain is Deferred for Sale-Leaseback under IFRS

Answer 33

* financing lease | * operating lease where sales price exceeds the fair value

Question 34

Amortization of Deferred Gain for Sale Leaseback

Answer 34

DECREASES RENTAL EXPENSE * Capital = proportion to the amortization of the leased asset * Operating = proportion to the gross rental expense over the life of the lease

Question 35

What if no PV information is provided for a Sale-Leaseback problem?

Answer 35

*probably means it is either all deferred or all recognized

Question 36

Subleases and Lease Classification

Answer 36

Operating: also operating Capital: *O & W = capital *N & S = operating

Question 37

Term Bond vs Serial Bond

Answer 37

``` Term = set maturity date Serial = redeemed pro rata ```

Question 38

What is an indenture?

Answer 38

A contract for a purchase of a bond

Question 39

To PV Components of Bonds

Answer 39

1. PV of lump sum (face) | 2. PV of annuity (interest payments)

Question 40

Two Things to Remember for Bonds

Answer 40

* divide interest rate by two | * double the period to allow for semiannual payments

Question 41

How are bond issue costs amortized?

Answer 41

Straight-line over term of bonds

Question 42

Is the straight-line method of discount/premium amortization allowed under IFRS?

Answer 42

No

Question 43

How are bonds recorded by an investor?

Answer 43

*amortized cost; discount amortization for issuer will increase the asset for the holder

Question 44

Bonds issued between interest dates

Answer 44

*amount of interest accrued decreases interest expense (or is a payable); customer pays that much more to have the bond now

Question 45

Two items to accrue for at year-end for bonds

Answer 45

Interest Expense & Discount/Premium

Question 46

What is a bond sinking fund?

Answer 46

*account used to accrue payments for bond redemption at maturity; also will include interest revenue on funds in the account

Question 47

Bonds Outstanding Method for Amortization of Serial Bonds

Answer 47

* add up outstanding value at each payment date (similar to sum of the years digits) * divide outstanding value by the summed value above and multiply it by the premium/discount

Question 48

Convertible Bonds = Two Methods

Answer 48

1. Book Value Method | 2. Market Value Method (will be a gain/loss)

Question 49

IFRS and Convertible Debt

Answer 49

*must show equity component based upon difference between FV and carrying value

Question 50

Two Methods for Accounting for Detachable Warrants

Answer 50

1. warrants only | 2. market value method

Question 51

Is it possible for bond extinguishment to be an extraordinary item?

Answer 51

Yes