F5 Flashcards
Identify the 3 classification used for the seller-lessee’s rights retained in a sale-leaseback under US GAAP.
Substantially all rights retained:
- PV of rent payments >= 90% FV of property
- All gain deferred and amortized
Less than substantial but more than minor:
- PV of rent payments 10% of FV
- Gain deferred up to PV of payments (operating) or capitalized asset (capital). Excess recognized immediately
Minor ( FV, Loss recognized in all cases
How does the lessee record the capital lease?
- At lower of FV or PV of min lease payments, using lower rate
- Min Lease payments include BPO and guaranteed residual value (PV of 1). Not executory or optional purchase
- Under IFRS, initial direct costs are part of lease asset
Name the criteria a lease to be capital for the lessor. (LUC)
Must have all three:
- Lessee “owns” the leased Property
- Uncertainties do not exist regarding any nonreimbursable cost to be incurred by lessor
- Collectability of the lease payment is reasonably predictable
What are the two methods for accounting for conversion of convertible bonds?
Book Value Method (GAAP): No Gain/loss recognized
Market Value Method (not GAAP): Gain/Loss recognized for difference between market value of stock and book value of bond
What is the difference between sales-type and direct-financing leases (lessor finances lease)?
Sales-type: Manufacturer’s or dealer’s profit or loss. FV differs from cost or CV
Direct-Financing: FV is same as cost or CV at beginning of lease term
The 2 methods of accounting for bonds with detachable stock warrants.
Warrants Only Method:
Warrants valued at FV in SE. Residual of bond proceeds assigned to bonds.
Market Value Method:
Bond proceeds are allocated to bonds and warrants according to their relative fair values.
What is in-substance defeasance?
When purchased securities are put into an irrevocable trust and pledges them for the future principal and interest payments on its LT debt.
Company remains primary obligor; therefore, liability is not considered extinguished
In an operating lease, how is a lease bonus treated by the lessee and lessor?
Lessor: Deferred and amortized as revenue over lease life
Lessee: Capitalized and amortized as expense over lease life
Name two methods of amortizing bond premium (discount)
Straight Line:
Premium(Discount)/# of period outstanding
Effective Interest Method:
Premium(Discount) Amortized = (CV x Eff rate) – (Face value x stated Rate)
Interest Expense = (Face Value x Stated Rate) + Discount Amort – Prem Amort = CV x Eff Rate
How is depreciation calculated for a cap leased asset?
Cap lease asset – SV = Base / Periods of Benefit = Expense
How is Gain/Loss calculated when a bond is extinguished before maturity?
Face x % Paid – (Face – unamort discount + unamort premimum – unamort bond issue cost) = or Loss
Reacquisition Price – CV = or Loss
