Lecture 5

Question 1

bond sinking fund

Answer 1

Bond sinking funds are accounted for in their own account including investments plus revenues(div,int)
less expenses.

Question 2

Depreciable life

Answer 2

This lease will be accounted for as a capital lease because the lease term of five years is 75% of the economic life of six years. Assets acquired under capital (finance) leases are depreciated using the same theory as purchased assets. The purchase option is for “ fair value.” It is not a “bargain purchase option” therefore the assumption cannot be made that Douglas Co. will acquire the machine at the end of the lease period. As a result, the machinery should be depreciated over the five-year lease term under both IFRS & U.S. GAAP.

Question 3

BPO

Answer 3

A bargain purchase option payment is included as part of the minimum lease payments to be discounted to the date of inception of the lease because it is a future cash flow that is considered certain

Question 4

Lease JE - initial entry

Answer 4

Equipment under finance lease

obligation under lease

Question 5

Lease JE- First payment

Answer 5

Obligation under capital lease
Interest payable ( not in first year)
Cash

Question 6

Lease JE: depreciation

Answer 6

leased asset / lease term

Question 7

Lease JE

Answer 7

Interest exp Pv*int rate (lesser of)

interest payable

Question 8

Sales lease back

Answer 8

Recognition of a gain resulting from the sale in a sale-leaseback should be deferred when the seller-lessee retains the right to substantially all of the remaining use of the property (as in a capital lease).

Question 9

Lease interest expense

Answer 9

The debt was incurred on December 31, Year 1. The initial payment was made on December 31, Year 1. No interest expense is recognized since no time has passed between when the debt was incurred and the payment was made. Thus, the full amount of the payment reduces the lease liability.

Question 10

Calculate payments

Answer 10

The fair value of the equipment is equal the present value of the future cash flows.

PV=annual rents*annuity due pv factor

ANNUAL RENTS *TERM= TOTAL CASH FLOWS

TOTAL CASH FLOW- PV OF CF=INTEREST REV

Question 11

Read carefully

Answer 11

The initial lease receivable equals $135,000. After the first lease payment is received two days later, the lease receivable equals $115,000 ($135,000 less $20,000). Year 1 interest revenue equals $5,750 ($115,000 x 10% x 6/12).

Question 12

Guaranteed residual value

Answer 12

Guaranteed residual value is, in effect, an additional lease payment and must be included in the calculation of the present value of the minimum lease payments

Question 13

Lease inducement

Answer 13

Annual rental revenue equals the total rental revenue from the lease allocated over the full life of the lease. In this case, revenue equals total cash divided by five years.

Question 14

interst rate - leases

Answer 14

use lessor of to calculate the PV and also the interest

Question 15

Sales Type lease

Answer 15

The excess of the present value of the selling price over its cost is recorded as profit.

Question 16

Depreciation - include salvage value -leases

Answer 16

When a lease is capitalized because of transfer of title or bargain purchase, depreciation is based on the life of the asset, not the lease. The cost includes the bargain purchase price. Depreciation cannot be taken below the salvage value.

Question 17

Rent expense - operating lease

Answer 17

Rent expense should include the first month’s rent and an allocated portion of the bonus. The last month’s rent should be shown as a prepaid expense.

Question 18

Leasehold improvements

Answer 18

Leasehold improvements should be amortized over the lesser of the remaining life of the lease (6 years), the life of the improvement

Question 19

leaseback

Answer 19

Because no present value information is given, we must assume that the Plane 1 lease is “major.” It qualifies as a capital lease because it meets the 75% test (8 year term out of 10 year life is 80%). In “major” sale-leasebacks, all gain is deferred. We must also assume that the Plane 2 lease is “minor” because it will be classified as an operating lease (it fails all “OWNS” tests we are able to perform based on the given information). In “minor” sale-leasebacks, there is no deferral.

Question 20

Deferred gains on sales leaseback

Answer 20

Under U.S. GAAP, when the seller-lessee retains only a minor portion (PV of leaseback is 10% or less of FV of the asset sold), any gain should be recognized immediately and none deferred.

Question 21

Estimated value at end of lease

Answer 21

not included in PV of MLP

Question 22

capital leae

Answer 22

Rule: if any one of the following conditions is met, a lease is considered a capital lease under U.S. GAAP and is treated as if owned by the lessee:
The lease transfers ownership to the lessee by the end of the lease term.
The lease contains a bargain purchase option.
The present value at the beginning of the lease term of the “minimum lease payments” equals or exceeds 90% of the fair value of the leased property.
The lease term is 75% or more of the estimated economic life of the leased property.

Question 23

interest revenue/expense

Answer 23

interest expense/rev for the next period is included in the current period

Question 24

Sales Type

Cash selling price =PV

Answer 24

Rule: In a sales-type (finance) lease, any difference between the fair value of the leased asset and its carrying value is recognized as manufacturer’s or dealer’s profit:

Question 25

Depreciation term

Answer 25

Lease should be depreciated (amortized) over the lease term if the lessee does not take ownership of the asset by the end of the lease or if there is not a bargain purchase option.

Question 26

IFRS sales leaseback profit

Answer 26

ule: Any profit on a sale-leaseback which is classified as a capital (finance) lease should be deferred and amortized in proportion to depreciation taken on the leased-back asset

Question 27

annuity due vs ordinary annuity

Answer 27

annue due begining of period

ordinary annuity end of period

Question 28

IFRS criteria

Answer 28

If the present value of the minimum lease payments amounts to 88% of the fair value of the asset, the lease would be classified as an operating lease under U.S. GAAP and would most likely be classified as a finance lease under IFRS. Under IFRS, a lease is classified as a finance lease if the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset. An argument could be made that 88% is “at least substantially all of the fair value of the asset.”

Question 29

IFRS direct cost of lease

Answer 29

Under IFRS, initial direct costs must be added to the finance lease asset at lease inception

finance lease asset PV+direct costs
lease bligation PV
cash direct costs

Question 30

leased asset

Answer 30

balance on lease asset - take out depreciation

Question 31

IFRS SALE LEASEBACK

Answer 31

he entire gain is deferred. The leaseback will be classified as a finance lease because the lease transfers substantially all the risks and rewards inherent in ownership to the lessee (the present value of the lease payments is substantially all of the fair value of the leased asset and the lease term is the entire economic life of the asset). When the lease in an IFRS sale-leaseback transaction is classified as a finance lease, all profit is deferred and amortized over the lease term.

Question 32

IFRS SALE LEASEBACK

Answer 32

Under IFRS, recognition of a gain resulting from a sale-leaseback transaction should be deferred and subsequently amortized if the lease is classified as a finance lease, or the lease is classified as an operating lease and the sales price is above fair value. If the lease is classified as an operating lease and the sales price is equal to fair value, the gain is recognized immediately. If the lease is classified as an operating lease and the sales price is below fair value, the gain is recognized immediately (although losses may be deferred in certain circumstances).

Question 33

Lessor

Answer 33

Lessors recording a lease receivable for a direct-financing lease should include the minimum lease payments PLUS any residual value. The reason for this is because the lessor can also expect to collect this residual value from the lessee at the culmination of the lease.

Question 34

Prepaying rent

Answer 34

remember how to account for it

Question 35

Operating lease

Answer 35

Operating lease expense must be recorded equally over the life of the lease. The average annual lease amount is $30,000 per year, or $2,500 per month.

Question 36

Operating lease

Answer 36

Rule: Operating lease payments to a lessor that should be deferred include security deposits, prepaid rent, and the unamortized portion of non-refundable payments to the lessor for leasehold modifications.
If an item is expected to be expensed or returned within one year or less, it is classified as current; otherwise it is long term.

Question 37

Sales type lease

Answer 37

Rule: In a sales-type (finance) lease, the difference between the fair value of the leased asset and its cost at inception is recognized as manufacturer’s or dealer’s profit:

Question 38

current iability

Answer 38

payment - interest =current liability

Question 39

sales type lease

Answer 39

In a sales-type lease, cost of goods sold is equal to the historical cost of the asset sold less the present value of the non-guaranteed residual value discounted over the life of the lease. By definition, cost of goods sold will be less than the historical cost of the asset sold.

Question 40

if payment made upfront

Answer 40

than leased asset will be different than lease obligation. remember that depre is calculated based on asset

Question 41

occupancy expenese

Answer 41

Occupancy expense would include the amount recognized as rent expense per the agreement plus depreciation. Rent expense takes into consideration amortization of the lease bonus over the life of the lease and depreciation of leasehold improvements over the shorter of the life of the improvements or the life of the lease. The security deposit is recorded as an asset until refunded at the end of the lease term.

Question 42

rent expense

Answer 42

The lessee should begin the recognition of rental expenses for the new office in January as rent expense is recorded over the lease term.

Question 43

Sales leaseback

Answer 43

GAAP requires that a loss to be recognized immediately in a sales-leaseback transaction when the fair value of the property at the time of the sale-leaseback is less than book value. Accordingly, the shipping company will recognize a loss in the current year because the fair value at the time of the sales-leaseback transaction was less than the undepreciated cost.

Question 44

lease bonus

Answer 44

he appropriate accounting treatment for a lease bonus to the lessor in an operating lease is that the bonus is originally recorded as deferred revenue and then amortized into income over the life of the lease.

Question 45

depreciation term

Answer 45

With a capital lease, the lessee should amortize the leased property over the economic life of the asset when there is a bargain purchase option or when the lessee takes ownership of the asset at the end of the lease term.

Question 46

B/P

Answer 46

To determine the market price of a bond, the present value of the principal is added to the present value of all interest payments, using the market(effective) interest rate.

Question 47

Interest payments

Answer 47

Interest payments on bonds are usually made semi annually. Bonds are ussually issued between interest dates, which requires additional entries for accrued interest. Bond issue proceeds plus accrued interest =l Total cash proceeds

Question 48

Initial entry

Answer 48

Cash
Premium on bonds payable
Bond Payable

Question 49

interest entry

Answer 49

Bond interest expense (NCVeffective rate)
Premium on bonds payable ( bnd int exp-fvcoupon rt)
Cash

Question 50

Bond premium and bond discount

Answer 50

At premium is when a bond is issued above its value. when you amortize the premium you debit the premium. Amortization of the premium reduces the carrying value of the payable. vice versa for discount

Question 51

carrying value of bond

Answer 51

CV=discount+premium+amortized discont-amorti premium

Question 52

Maturity date

Answer 52

the bond carrying value will be the maturity value, regardless of the amortization method used, since this is the maturity date.

Question 53

Bond carrying value

Answer 53

Bond Carrying value less unamortized plus unamortized premium discount less unamortized bond issued costs

Question 54

convertible bonds ( BV method)

Answer 54

B/P Cost
Preimium on B/P (% converted*premium)

C/S Par
APIC plug

Question 55

convertible bonds ( MV method)

Answer 55

B/P                   Cost
Preimium on B/P (% converted*premium)
Loss on conversion   plug
   C/S           Par
   APIC        FV-PAR value

Question 56

Detacheable warrant ( Initial) warrants only method

Answer 56

Cash
Discount on B/P plug
B/P
APIC Warrants FV

Question 57

half are exercised ( Warrants only method)

Answer 57

Cash
APIC-Warrants 50% of apic warrats

C/S
APIC plug

Question 58

Detacheable warrant ( Initial) book value

Answer 58

Cash sold at
Discount on B/P plug
B/P
APIC Warrants (fv warrant/total value )*sold at price

Question 59

interest expense

Answer 59

Interest expense is recognized for the entire period from bond issuance (June 1) through the fiscal year end (December 31).

Question 60

Bond issue costs

Answer 60

Cash
discount
bond issue cost
Bonds payable

Question 61

Bond issue costs

Answer 61

Bond issue costs are recorded as deferred charges, and amortized over the life of the related debt. Amortization usually follows the straight-line method. Amortization for 1 1/2 years should have been recorded.