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Accy 4356

Test 2

Why lease instead of buy? 1. Tax advantages (rent expense is deductible) 2. Off-balance-sheet financing (avoid recording financial obligation) 3. Avoid risk of obsolescence
Leases contracts include any provision wanted by both lessee (acquires right to use) and lessor
Legal substance of lease generally (does/does not) transfer ownership Does not; requires lease payments However, SOME leases transfer all risks adn benefits of ownership (economic substance - purchase by lessee)
1. Accg recognizes economic substance over legal form 2. Accg recognizes legal form over economic substance answer 1.
For Lessee: if economic substance of lease is NOT transferring ownership, then Operating Lease. Otherwise, Capital Lease
What are the journal entries for each company if 1. ABC owns building 2. XYZ signs operating lease for building 1. ABC depreciates bldg and reports rev from rent 2. XYZ reports rent expenses as pymts are made (so Rent Expense increases and Cash decreases)
What is a benefit to off-balance sheet financing? Keeping asset and debt off B/S avoids adverse affects on debt ratios
MUST classify as capital lease if only ONE of the following is true: 1. Ownership transferred at end of lease 2. Bargain purchase option (reasonably assured it will be exercised) 3. Lease term is > or = 75% of life of leased item 4. PV of minimum lease payments is >or= 90% FMV of leased item.
Minimum Lease payments include: 1. Periodic payments 2. Bargain Purchase Price 3. Guaranteed Residual value to be returned 4. Any pymts due to failure to renew/extend lease
Executory Costs: ownership-type costss: maintenance, insurance, etc.
Are executory costs included in minimum lease payments? NO. Expensed by lessee.
Which amount do you record when recording an asset and liability (if lessee)? Record the PV MIN. LEASE PYMTS (using lower of lessee's incremental borrowing rate or the implicit rate if the lease is known)
What do you record on the statement of cash flows and balance sheet when signing and recording a new capital lease? record new asset (Leased Equipment) and liability (Lease Obligation); separate disclosure of investing outflow and financing inflow.
How do you depreciate the asset if you essentially get ownership (through ownership transfer or bargain purchase option)? Depreciate it over the LIFE of the ASSET
How do you depreciate an asset if you don't essentially get ownership? Depreciate over life of LEASE
When you depreciate an asset, how is this recorded on the Balance Sheet and Income Statement? Balance Sheet - Lower net equipment (PP&E), lower OE (lower NI closed into RE) Income Stmt: Increase Expenses and lower NI
What do you record as a journal entry after your first payment? Reduce Cash, Increase Interest Exp., and Reduce Lease Obligation
What do you record after returning the asset? Decrease Leased Equip and Accum Deprec. Accts to zero.
What do you record after making payments on an operating lease? Increase Rent Expense on IS (or Oper. Exp.), and decrease Operating Activities on CF Stmt
What is the difference between expenses in an operating lease and a capital lease? capital lease accelerates expense recognition, so: 1. Difference in timing of expense 2. Difference in Stmt of Cash Flows
Why would Management want to avoid a capital lease as opposed to an operating lease? Keeping an asset and liability off the balance sheet affects the debt-to-equity ratio and Return on Assets (ROA)
If guaranteed Residual Value, then it (is/is not) part of minimum lease payments is
What do you do is the asset is worth less than guaranteed RV? Must give cash to make up the difference. Thus, reduce cash and increase a loss for this loss in value. (ex: worth only $2500, give $500 cash and decrease cash acounts and recognize loss)
What types of leases have to have disclosures in financial stmts? What must be disclosed? ALL types of leases (operating and capital leases). General description of leases must be disclosed
Reasons to reduce Owner's Equity: 1. Distribute Earnings of corporations to investors in form of dividends.2. Return the contributed capital to investors (repurchase, recall stock, distribute liquidating dividend)
Why repurchase stock (stock buyback)? (6 things) 1. Need shares for employee stock option distribution - temporary reduction of equity.2. Shift mix of debt and equity3. Signal higher future expectations and/or believe shares are undervalued (up price)4. Surplus cash is not desired, give cash back to som
Methods of reducing equity: 1. Declare dividends (non-stock form)2. Distribute liquidating dividend3. Recall (retire, call in) callable PS4. Buy-back stock
What are some outlets to buyback stock? Open market, fixed-price tender offer, dutch auction tender offer, targeted block repurchase
What is greenmail? When an investor may acquire a large block of stock and threaten a hostile takeover unless management buys out the "greenmailer" at a price premium.
Describe the Open Market method to buyback stock. Most common (95%), a corporation acquires shares in the same manner that an individual investor would normally acquire shares, through a stock broker.
Describe the Fixed-Price Tender Offer method to buyback stock. More common pre-1981, public, open offer to all stockholders to tender their stock for sale at a specified price for a specified time.
Describe the Dutch Auction Tender Offer method to buyback stock. (aka Descending Price Auctionm began 1981), a corporation gathers info from shareholders on the price that shareholders are willing to accept in ecxhange for the number of shares that they hold.
Describe the Targeted Block Repurchase method to buyback stock. Usually used to avoid hostile takeover, target a specific block of shareholders, identify who they are, and negotiate with them directly.
When you reduce equity through dividends, which accounts are affected and how? Cash (or Property) decreases, RE decreases, OE decreases. Stock increases, RE decreases, Contrib. Capital increases.
When you reduce equity by liquidating dividends, which accounts are affected and how? Cash or property decreases, contributed capital decreases, total OE decreases. Payment from capital rather than earnings
When you reduce equity by retiring callable PS, what accounts are affected and how? Cash decreases, PS & APIC decreases, RE decreases, total OE decreases (but no "loss")
Treasury stock (is/is not) an asset is not; it is a contra-equity account. DO NOT recognzie gain or loss.
When there is a "gain" from buying back stock, which accts are affected and how? increase APIC-TS
When there is a "loss" from buying back stock, which accts are affected and how? decrease RE
When you re-issue treasury shares, what accounts are affected and how? increase Cash, remove TS at COST, and adjust other OE accts as needed.
When you retire treasury shares, which accts are affected and how? remove TS and remove CS and APIC based on original price. Adjust other OE accts as needed. No TOTAL change to OE, though.
If you retire CS and pay LESS than the original issue price, which accts are affected and how? reduce CS at par, reduce APIC-CS at orig price, increase APIC-Stock Retirement by remainder. Decrease cash
When you retire CS and pay MORE than the original issue price, which accts are affected and how? Decrease CS at par, decrease APIC-CS at issue price minus CS at par, reduce RE.
Reasons to reduce debt: 1. Debt levels too high2. Debt covenants are too restrictive3. Cheaper financing is now available
Methods of reducing debt: 1. Pay off at maturity2. Early Retirement through open market purchase, calling in callable debt, or inducing a conversion of debt to equity
Do you include an early extinguishment of debt on the income statement if it is at a gain or loss? Yes, but it is NOT recognized from a buyback of stock. Report as "Other Gain/Loss" on Income Statement unless qualifies as extraordinary
What do you record each year when you're trying to pay off at maturity? 1. record interest expense at market rate in effect AT ISSUANCE.2. Amortizing the discount away (eventually down to zero)3. Net carrying value is getting closer to face value
Which accts are affected when you pay your final int. payment and retire at bond maturity? Bond payable decreases by $1000, Cash decreases by $1000
What is the external decision maker's view of debt reductions? reduces risk and increases financial flexibility
How do you treat proceeds of convertible bonds at issuance? treat as debt
When you convert debt, how is the B/S affected? Remove debt from books and replace with equity. A gain or loss may be recognized, but NO affect on stmt CF
Created by: Chelsealj
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