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Accy 4356
Test 2
| Question | Answer |
|---|---|
| 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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