FAR 5 Flashcards
Capital Lease Criteria for Lessee
O.W.N.S.
1 of following:
O.- Ownership transfer at end of lease
W.- Written option for bargain purchase
N.- 90% of leased property FV<= PV of lease payments*
S.- 75% or more of assets economic life in lease term*
N. & S. cannot be used for a lease that begins within last 25% of original estimated economic life of leased property.
Capital lease criteria for Lessor
L.U.C.
L.- Lessee “owns” - one of lessee criteria met
U.- Uncertainties do not exist regarding any unreimbursable costs to be incurred by lessor
C.- Collectability of lease payments reasonable predictable
Direct Financing Lease
The FV of the leased property at the inception of the lease is the same as the cost or carrying amount.
Lessee records lease as an asset and a liability of the lower of:
- FV of the asset at the inception of the lease
2. Cost= PV of minimum lease payments
Interest rate in minimum lease payments
Lessee uses lower of:
- Rate implicit in the lease (if known)
- Lessee’s incremental borrowing rate (rate available in the market to the lessee (not prime))
Depreciation Rules (GAAP)
Capitalized lease asset - salvage value
Use O.W.N.S.
Ownership - depreciate over asset life
W - depreciate over asset life
N- depreciate over lease life
S.- depreciate over lease life
Types of Bonds
Debentures - unsecured bonds
Collateral Trust Bonds- secured bonds
Convertible Bonds - convertible into common stock of debtor (nondetachable warrants & detachable warrants)
Participating Bonds - states rate of interest & participate in income if certain earnings levels obtained
Term Bonds - single fixed maturity date, entire principal paid at end of term/period
Types of Bonds Continued….
Serial Bonds- pre-numbered that the issuer may call and redeem a portion by serial number
Income Bonds- pay interest only if certain income objectives met
Zero Coupon- aka deep discount, sold with no stated interest but rather at discount and redeemed at face value without periodic interest payments
Issue Price of Bond
PV of cashflows w/ bonds discounted at MARKET RATE
Face amt (PV of single amt) - use market rate Int pymts (PV of an annuity)- use market rate
Int expense - carrying value of bond x effective interest rate
Issuance at Discount
Stated rate < market (effective) rate
*cash proceeds less than face amount
Dr. cash (PV of cash flows)
Dr. (diff) discount on bonds payable
Cr. Bonds payable (face amount)
Issuance at Premium
Stated rate > market rate
*cash proceeds > face amount
Dr. Cash (PV of cash flows)
Cr. Bonds payable (face amount)
Cr. Premium (difference)
Convertible Bonds - Book Value
No gain/loss recognized. At conversion, bond payable and related premium/discount written off and common stock is credited at par. APIC credited for excess.
Bonds with detachable stock purchase warrants (warrants only method)
B/C detachable, traded separately and treated that way.
Value assigned to conversion feature is its relative FV.
Dr. Cash
Cr. Bonds Payable
Cr. A.P.I.C. - warrants
Bonds with detachable stock purchase warrants ( market value method) - exercised
Used if FV of bonds & warrants known
Sales price allocated to bonds and warrants based on relative market value:
Bonds: sales price x (bond market/total market)
Warrants: sales price x (warrant market/total market)
Dr. Cash
Dr. APIC - warrants for above amount
Cr. Common stock
Cr. APIC ( could be plug)
Bond extinguished b/f maturity
If bond is extinguished b/f maturity, gain or loss is generally recognized
