Financial F5

• ordinary=payment at end of period
• due=payment at beginning
• PV of annuity due=ord+1

asset that is amortized over the life of the lease SL

• in PP&E and capitalized over lesser of :
• lease life
• or
• life of improvement

• non refundable=unearned rev amortized
• refundable=receivable for lesee and L for lessor

• Ownership transfers at end of lease
• Written option for bargain purchase
• Ninety percent of leased property fair value<=PV of lease pmts
• Seventy-five percent or more of assets economic life is being committed in lease term

• OWNS without the specific percentages and also
• Fluctuations in fair value of residual accrue to lessee
• Ability to continue lease again for substantially lower than market rate
• Cancel of lease makes lessee bear loss
• Specialized nature of assets so only lessee can use them

• Lessee "OWNS" leased property
• Uncertainties don't exist regarding what to do with unreimbursable cost incurred by lessor
• Collectibility of lease pmts is reasonably predictable

• when lease begins fair value of property does not equal lessor's carrying cost
• lessor has gain on sale and interest income

• when lease begins, fair value of property is the same as the carrying cost
• lessor only has interest income

• A and L recorded at lesser of:
• fair value at beginning of lease or
• cost=PV of lease payments

• include=required payments, PV of bargain purchase option, gauranteed residual value
• exclude=executory costs, optional buyout that is not a bargain

lesser of rate implicit in lease OR lessee's incremental borrowing rate

• O=estimated economic life of asset
• W=estimated economic life of asset
• N=lease term
• S=lease term

lesser of lease term or useful life of asset

• lease payments
• +ungauranteed residual value
• gross investment

• Gross investment
• x PV rate
• net investment

• Gross investment
• (net investment)
• unearned interest revenue

• Cost of A
• (PV ungauranteed residual value)
• COGS

• fair value (sales price)
• - book value

amt of profit that exceeds PV of lease pmts

• sale price
• (NBV)
• tentative gain
• (PV of lease pmts) excess gain

• sale price
• (NBV)
• tentative gain
• (leaseback asset)
• excess gain

• 1. substantially all rights retained=PV of rent pmts>= 90% of the fair value of the property=major, defer all gain and amortize over leased asset
• 2. less than substantial but greater than minor=PV of rent pmts between 10 and 90% of fair value of property=middle, defer gain up to PV of pmts, and recognize the rest.
• 3. minor=PV of lease pmts<10% of fair value of property=minor, recognize all gain

if fair value of property<BV, recognize loss immediately

if sale price<fair value, defer loss and amortize over leaseback period

capital leaseback=amortized in proportion to amortization of asset. deferred gain is unearned profit on sale-leaseback

operating leaseback=deferred gain amortized in proportion to gross rental expense over life of lease. deferred gain is unearned profit on sale-leaseback

• financial lease=profit deferred and amortized over lease term
• operating lease=1. if sale price is same as fair value=no deferral 2. if sale price>fair value=profit deferred and amortized over time asset will be used 3. if sale price< fair value=g/l recognized immediately. (pg. 28)

sublease is operating

• O or W capital=sublease is capital
• N or S capital=sublease is operating unless it meets a capital lease requirement

when it meets definition of a liability

• when reasonable estimate can be made
• PV of future liability

• journal entry
• D to A retirement cost (asset)
• C to A retirement obligation (liability)

add to liability to adjust it's PV up and eliminate discount that it was recorded at

• journal entry
• D to accretion expense
• C to ARO (increase liability)

reduce carrying value of ARC down to zero throughout accretion period

• journal entry
• D to depreciation expense
• C to accumulated depreciation (reduce asset)

cumulative accretion expense+cumulative depreciation expense=total undiscounted ARO

• increase undiscounted cash flows=new liability, use current discount rate
• decrease undiscounted cash flows=remove old liability, use historical or weighted average discount rate

• liability related to polution (ex. BP oil spill)
• treated like ARO
• accrue for liability if 1. impaired asset/liability incurred at date of financial statements 2. loss can be reasonably estimated

unsecured bonds

• single fixed maturity
• all principal paid at end of term

• pre-numbered
• issuer can call and redeem by serial number

• PV of future interest pmts at market rate
• PV of principle at market rate

• coupon rate<market (effective) rate
• amortization icnreases interest expense

• journal entry for issuer
• D to cash
• D to discount on bond payable (contra acct to bonds payable)
• C to bond payable

• journal entry for investor
• D to investment in bond
• C to cash

• coupon rate>market (effective) rate
• amortization decreases interest expense

• journal entry for issuer
• D to cash
• C to premium on bond payable (direct addition to bond payable)
• C to bond payable

• journal entry for investor
• D to investment in bonds
• C to cash

• GAAP=deferred charge (asset), amortize using SL
• IFRS=deduct from carrying value of liability and amortize using effective interest method

• 2 ways-straight line or effective interest method
• amortization period=time bonds are outstanding, GAAP=contractual life of bond, IFRS=expected life of bond

not GAAP but allowed if not materially different from effective interest method

premium or discount/# periods bond outstanding=amortization per period

interest expense=coupon - premium OR + discount amortization

• issuer
• D to bond interest expense
• C to disount on bond payable (for amortization amt)
• C to cash (for coupon)

• investor
• D to cash (for coupon)
• D to investment in bonds (for amortization amt)
• C to bond interest revenue

• required by both GAAP and IFRS
• results in a constant RATE of interest each period but different amounts

interest expense=carrying value at BEGINNING of period*effective interest rate

• amortization of discount=interest expense-coupon paid
• amortization of premium=coupon paid-interest expense

• issuer
• D to bond interest expense
• D to premium on bond payable (for amortization amt)
• C to cash (for coupon)

accrued interest added to price of bond

• issuer adjusts books at year end for accrued interest
• pro rata share of discount or premium as well

• journal entry
• D to interest expense (coupon)
• C to interest payable (coupon)
• D to interest expense (discount amortization)
• C to discount on bonds payable (discount amortization)

• sold at more than face value because of conversion feature
• GAAP=all issue price allocated to bonds because conversion feature is hard to value
• IFRS=bonds at fair value excess goes to equity

• GAAP required
• no I/S impact, only c/s and APIC