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F6 Flashcards

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1
Q

Fnancial lease

A

Ownership transfers to lessee in the end
Written option
Net Present Value Minimum lease/FV of asset>90%
Economic life 75% of life of asset
Specialized unique asset, no alternative use

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2
Q

Failed sale

A

If underlying lease in sale-leaseback is finance lease it is considering repurchase failed sale

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3
Q

Operating lease JE for Lessee

Total Interest Amount: CV ROU from contract-PV of ROU Asset

A
  1. DR ROU Asset (Payments (Annuity)*PV
    CR Lease Liability
  2. Payment of interest & ROU Asset Amortization:
    DR Lease Expense
    CR Cash
    DR Lease Liability
    CR Accum. Amortization-ROU Asset
    Use Amort Schedule (PV ROU Asset*%) minus annual/semiannual payment. Interest getting lower every year, amortization grow, CV -zero in the end of lease.

Total Interest Amount: CV ROU from contract-PV of ROU Asset

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4
Q

JE Operating Lease for Lessor (Owner)

Lessor has no interest income in Operating Lease. Only Rental Income!
Lessor keeps equipment on his balance sheet

A
  1. DR Lease Receivable (Annual payment*# of payments)
    CR Unearned Lease Rent Income
  2. 1st payment & Asset Depreciation
    CR Cash
    DR Rental Income
    DR Unearned Rental Income
    CR Lease Receivable
    DR Depreciation Expense
    CR Accumulated Depreciation
    (CV/Useful life)/2 if every 6 months
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5
Q

What rate to use to calculate PV of lease Payments?

A

The rate implicit in the lease if known

by lessee /% Rate what lessor expects to return

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6
Q

Calculate total lease consideration

A

Baseline Payments-Lease Incentive+ Guaranteed Payment

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7
Q

The reduction of the lease liability in Year 2

A

Should be equal to the current liability shown for a lease for year one (Principal due in year one)

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8
Q

Depreciation by lessee if transfer title

A

(Lease total - minus salvage value- FV)/asset life. Depreciation can’t be less than salvage value

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9
Q

Calculate lease liability if residual value of asset given

A

PV of annuity for annual payment +PV of for 1$ for residual value

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10
Q

Sales type finance lease. Calculate profit and interest.

A
  1. Profit recognized 1 year. Lease amount (price) - Cost of equipment
  2. Interest revenue. Lease Price-immediate paymentlease %1/2 year if not full year
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11
Q

Depreciation Expense for Finance Lease with no purchase option

A

PV of minimum lease payments/ LEASE TERM

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12
Q

If 1st payment due on signing:

A

Take less years for calculating PV factor and amortization

To recognize asset PV lease payment+1st payment at the date lease was signed

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13
Q

What is the total amount of interest revenue over the life of the lease?

A

PV/FAIR VALUE of equipment =ANNUAL RENTPV FACTOR
*Annual rent=FV/PV factor
Interest Revenue
INTEREST REVENUE=TOTAL CASH FLOW -LESS PV

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14
Q

ROU Asset

A

1 Year. DR ROU Asset (PV of lease +initial cost)
CR Lease Liability (PV)
CR Cash paid for initial cost
2 Year. ROU Asset minus depreciation
Lease payment doesn’t reduce ROU, but reduce lease liability

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15
Q

Profit on the sale for lease equipment

A

Present value of payments minus Carrying Cost of equipment = Profit on Sale

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16
Q

Lessor JE to record Sales Type lease

A

DR Lease Expense (Initial Cost)
DR Residual Value *PV factor
DR Lease Receivable PV of all lease payments

    CR Cash (Initial Cost)
     CR Gain  (FV-Carrying Value)
      CR Equipment
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17
Q

Direct Financial Lease

A

Present Value + Residual Value=FV Asset

Colectibility Probable

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18
Q

Operating Lease (Income Statement)

A

One expense: Lease Expense included in income from continuing operations in IS

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19
Q

Finance Lease Lease (Income Statement)

A

Two Expenses: In Income statement included:
Amortization of ROU asset
Portion of Lease Expense elated to interest on the lease liability

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20
Q

If residual value of leased equipment paid by 3dr party

A

Don’t include in total amount f lease obligation

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21
Q

Derivatives. No cash outflow except options.

A

FV hedge-commitment already recognized asset/liability ,e.g. inventory cost changing, buying put to offset loss
FV Hedge goes to IS (Gain/Loss of FV loss).
CF Hedge- to offset variability of future cash flow. Ineffective portion goes to IS, effective portion goes to OCI-Effective portion of hedge

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22
Q

Intrinsic value

A

Difference between the market price and present strike price at point of time

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23
Q

A gain or loss from forward exchange contract for speculation (doesn’t relate to a specific transaction and opposite hedging) is equal/What amount of foreign currency gain to include in income from this forward contract?

A

Gain or loss on for future commitment recognized in current income. Difference in forward rate at the date contract was purchased and the forward rate at BS date

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24
Q

If option was not exercised

A

Must be reported at FV on BS with unrealized gains and loses reported in net income

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25
Settlement amount for option?
Notional amount(how many)*underlying (price or rate)
26
SWAP derivative fixed rate to variable rate
CF Hedge. OCI
27
Translation-OCI
Remeasurement -Income Statement
28
Don't record any initial JE for derivatives when company takes long/short position
Except options if premium was paid
29
JE for CF hedge at BS Date (Keep asset at market value). There is no initial JE for Hedge.
DR Cash Flow Hedge | CR OCI
30
JE CF Hedge at settlement
``` DR Cash (Net settlement price: Inventory beginning price minus settlement price,gain/loss included) CR CF Hedge ```
31
JE CF Hedge when inventory sold
DR AR CR Sales DR OCI CR Gain on CF hedge (reclass to IS from OCI)
32
``` Option type -Call (Buy). Underlying 5000 pieces Strike Price-$22 Premium-$3 Option exercised when stock jumped to $30 ```
Benefit if Price goes up: | Profit: 30-22-3=5*5000
33
Buying a call: You have the right to buy a security at a predetermined price. Selling a call: You have an obligation to deliver the security at a predetermined price to the option buyer if they exercise the option.
Buying a put: You have the right to sell a security at a predetermined price. Selling a put: You have an obligation to buy the security at a predetermined price from the option buyer if they exercise the option.
34
Derivative transaction with no hedge designation. Hold for trading purpose.
Goes to IS, CF Operating
35
Put option
When Put option "in the money" buyer exercises option, if out of the money-note. Strike exercise price vs market price
36
Intrinsic value
Difference bw market price and strike price at point of time. If increased: DR Asset CR Unrealized gain
37
Option Contract is Derivative with no hedging option
Must be reported on BS at FV with unrealized gains and losses reported in net income. Option FV=TIme value+(Mkt price-Strike price at point of time)
38
Long hedge ( manufacturer buy wheat)
You worry that price will go up
39
Short hedge (farmer) sells wheat
You worry price will go down
40
If you buy Call or Put option
You buy Asset:
41
If you sell Call or Put Option
You own Contingent liability
42
If you buy Call Option
You win, if Price of stock goes up because you can by it for cheaper price and sell for current price paying Premium
43
If you buy a Put Option
You win, if Price of stock goes down because you can sell it for higher price than market price. You just need to pay premium.
44
Net investment hedge
Goes to Cumulative translation Adj OCI
45
CF Hedge effective Portion
OCI
46
If you sell a call
You give a purchaser a right to buy a stock at fixed amount, you win if stock price goes down because the byer won't exercise the option
47
Total loss/gain on selling Option
(Mkt price-strike price)=Total gain/loss Reduce loss for premium if buyer wins If Option was not exercised, gain-sum of premium
48
Swap pay fixed rate get variable rate (cash outflow)
CF hedge
49
If Derivatives with no hedge designation being held for trading purposes
Net Cash reporting in Operating sections
50
No Hedge designation derivatives transaction (speculation)
Gain recorded in IS | CF reflected in Investing section
51
Derivatives
ALL Derivatives measured at FV
52
Which instrument has the least credit risk
Futures contract as it made through clearing house which guarantees transaction
53
Remember!
Comprehensive income=Net Income + OCI so changes in FV Hedge and Ineffective Portion of CF Hedge impact Comprehensive Income
54
If you compare strike price in Put/Call option REMEMBER:
1. Find difference strike minus market and only then deduct premium.
55
Calculate when Customer will gain if strike price $10 per share and premium $2
1. Put option at 7$ current mkt price. Price went down, but customer exercise option to sell for $10. Gain $10-$7=$3-$2=$1 2. Call option at $12 mkt price. Customer can buy for $10. Gain $12-$10-$2=$0 3. Put option and $13 mkt. Customer won't exercise right to sell for $10 when he can sell for $13 4. Call and $8 mkt. He won't exercise right to buy for $10 when he can buy it at $8.
56
FV Hedge
``` To record loss DR Loss on purchase commitment CR Purchase commitment liability To record the gain: DR FV Hedge CR Gain To record Net settlement: DR Cash CR FV Hedge ``` DR Purchase Commitment liability DR Inventory CR Cash
57
Under Translation Method translated:
Capital -Historical Rate All IS accounts-Weighted avg BS-Year end spot
58
Under Translation Method translated: | Income from continuing operations, at gross amount
Capital -Historical Rate All IS accounts-Weighted Avg BS-Year end spot
59
Remeasurement currency rates
BS- monetary (AR, Long Term debt)-Spot year end BS-nonmonetary (Inv, Fixed asset, stock) -Historical IS-Weighted avg Sales , BS related (Inv,COGS, Amortization) Historical
60
Translation for foreign currency
BS Assets and Liabilities- year end spot, stock-historic | IS weighted avg always
61
Deferred tax Asset reported. Reversal of current temporary difference will result in
Deferred Tax Asset is future Tax Saving. Reversal result in future Deductible Amounts. Tis deductions will reduce amount of future tax owned. Company had Profit. If it had a loss DTA would be zero because company would not have future income to use tax benefits.
62
What item is NOT subject for INTRAperiod income tax allocation
Operating income Items for intraperiod (within 1 y) income tax allocation: * Income from Continuing Ops * Income from Discontinuing Ops * Accounting Principle Change OCI PUFIER
63
When Income recognized before it is reported as taxable income
deferred tax liability should be reported.
64
Which statement if correct regarding valuation allowance
The effect of the change in opening balance of valuation allowance that results from a change in circumstances is included in income from operations
65
Current portion of income tax expense
It's mount payable to IRS in current year
66
Income Tax Expense
Taxable Income *Rate%=Currant Tax Expense Tax Expense-Estimated Tax Payment=TAx Liability
67
Current income tax liability- Tax due this year
Deferred tax liabilities-Tax due next year
68
Effective Tax rate
Income Expense/ Pretax Income
69
Perm differences for tax purpose NEVER TAXIBLE
* Municipal Bonds * Life Insurance where Comp beneficiary * Dividends 5% ownership =50% of dividends are not deductible * Premium of officer life insurance there company is owner
70
``` DTL 1. Wait till you collect money: Installments Sales Contractors Accounting % Equity method (Undistributed dividend) 2.Expense now pay later: Depreciation expense/Amortization Prepaid Expense (Cash Basis) Increase in rent receivable, earned but didn't get cah. Pay tax later ```
Future Tax income is more than IS income, more Tax will be paid
71
``` DTA Estimation of future expense: 1.Allowance (Bad debt expense) 2. Warranty Expense 3. Start Up Expense 4. Operating loss carried forward 5.Warranty obligation increase Pay tax now because you got money, save later: Unearned/Prepaid Rent, Interest and Royalties ```
Future Tax income is less than IS income
72
Indirect rate. 1 US dollar could purchase 0.75 euro
euro=1/0.75
73
Calculate Principal amount of lease obligation
Annual lease payments*PV factor (use rate implicit what lessor expect to get
74
Using strait line method what amount should Lessee recognize as depreciation expense for 1 year? Depreciation expense=Minimum lease payments/Lease term
Lease recorded as asset/liability at PV of minimum payments. Lease depreciated/amortized over lease term if ownership doesn't transfer and no written purchase option.
75
Calculate total amount of interest revenue for the whole life of the lease without purchase option.
Annual lease payment=PV/Annuity due factor | Interest revenue=Total Cash flow- PV of cash flows
76
Lease Expense=
Payment year, 1/2
77
JE for operating Lease. | Lessor keeps equipment on his balance sheet
JE for Leese DR ROU Asser JE for Lessor
78
DTA and DT Liability
Always: Non Current regardless of expected reversal date
79
% of Exclusion of dividend income from Tax return. Permanent difference.
Ownership less 20%-exclude 50% Ownership 20%-80%-exclude 65% Ownership over 80%-exclude 100%
80
Tax return vs GAAP Fin Statement
Tax return- Report % of your share of dividend income | Fin Statement- Equity method (20-50%) Report your share of Sub income
81
Deferred Tax asset/Liability presented in BS
Net non-current deferred tax assets or liability
82
NOL 5 years carry back or 18/19/20- No limitation
LOL carry fwd starting 2021 -80% limit
83
Equity and Dividends received limitation
65%
84
If expense if negative=DTL
If expense positive-DTA
85
Income Tax Expense 2 Q
(Income Q1+Income Q2)*Rate Q2-Tax Q1
86
Reversing valuation allowane
Restoring the asset (benefit) and decreasing income tax expense

FAR (12 decks)

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