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CLFP EXAM - Financial and Tax
Accounting for Leases Questions &
Correct Answers/ Graded A+
What is a primary goal of the accounting profession? ๐ธ๐ธ : Consistent treatment of like transactions to allow clarity in presentation and consistency in interpretation of financial statements prepared by various individuals or entities. How did APB (Accounting Principals Board) fail? ๐ธ๐ธ : Created Opinion #5 (Reporting of Leases in Financial Statements of Lessees) and Opinion # (Accounting for Leases in Financial Statements for Lessors) that ha different opinions and left lessors & lessees with conflicting rules. What was FASB 13? ๐ธ๐ธ : Financial Accounting Standards Board issued "Accounting for Leases" which was a comprehensive set of standards to be followed by lessors and lessees in accounting lease transactions. What is Accounting Standards Codification? ๐ธ๐ธ : Approved by FASB in 7/2009, a single source of of authoritative US accounting and reporting standards
What now governs lease accounting? ๐ธ๐ธ : ASC 840 What is a Bargain Renewal Option? ๐ธ๐ธ : a provision allowing lessee, at his option, to renew the lease for a rental sufficiently lower than the expected fair value of the property at the date the option becomes excercisable. It is reasonably assured the renewal option will be exercised. What is a Bargain Purchase Option? ๐ธ๐ธ : a provision allowing lessee, at his option, to purchase the property for a price sufficiently lower than the expected fair market value of the property at the date the option becomes excercisable. It is reasonably assured the purchase option will be exercised. What are Contingent Rentals? ๐ธ๐ธ : Rentals that represent increases or decreases in the lease payments made that result from changes in the factors on which lease payments are based occurring subsequent to the inception of the lease. Increases may occur due to increased construction cost or indexed interest rates. What is Economical Useful Life of Leased Property?
What is Inception of the Lease? ๐ธ๐ธ : The date lease commitment. What is Incremental Borrowing Rate? ๐ธ๐ธ : The rate, at the inception of the lease, the lessee would have incurred to borrow, under like terms, the funds necessary to purchase the lease asset. What is Initial Direct Cost (IDC)? ๐ธ๐ธ : Costs incurred by lessor that are
- to originate the lease in transactions with independent third parties that are required and would have occurred regardless of leasing 2.) certain cost incurred by the lessor What is a Lease? ๐ธ๐ธ : An agreement conveying right to use property, plant or equipment for stated period of time and rental payment. What is Lease Term? ๐ธ๐ธ : The fixed, non cancel-able term of the lease plus:
1.) period covered by bargain renewal options 2.) period covered by a renewal when a significant penalty for failure to renew exists; 3.) Ordinary renewal periods 4.) Renewal periods that precede a bargain purchase option. 5.) Renewal periods that are at the option of the lessor 6.) does not exceed term beyond when the bargain purchase option can be exercised. What is Maximum Lease Payments? ๐ธ๐ธ : All payments the lessee is obligated to make under the lease agreement (outside of executory costs) 1.) minimum rentals 2.) Lessee guarantee of the residual value 3.) Penalties for failure to renew. 4.) Calc for lessor to include guaranteed residual What is a Non-Cancelable Lease? ๐ธ๐ธ : A lease that is only cancelable upon: 1.) Occurrence of some remote contingency; 2.) Permission of lessor; 3.) Entrance into a new lease with the same lessor;
- If lender is lending assets - typically operating lease What dictates the proper treatment of a lease on the lessors books? ๐ธ๐ธ : ASC 840. If any of the following are met at time of lease inception, capital lease treatment is required. 1). transfer of ownership at lease end; 2.) bargain purchase option; 3.) lease term >= 75% property economic useful life 4.) PV of payments > 90% of fair value (less tax credits) If a criteria of ASC 840 is met, what additional criteria must be met to classify as a capital lease? ๐ธ๐ธ : In addition to meeting an ASC 840 criteria, both of the following must be met to classify as capital lease: 1). collectibility is reasonably certain; 2.) No important uncertainties surround the amount of the non-reimbursable costs to be incurred by the lessor under the lease. How should manufacturer account for a sale-type lease? ๐ธ๐ธ : 1 .) take sale profit, or 2.) capitalize the expense as IDC 3.) Can't to both
How should a lessor account for a direct finance lease? ๐ธ๐ธ : Net investment (book value) in the lease is recorded as an asset on the balance sheet: +Gross Investment
- Unearned Income = Net Investment What is Gross Investment? ๐ธ๐ธ : The sum of all the min. lease payments plus the un-guaranteed residual value. What is Unearned Income? ๐ธ๐ธ : Is the gross investment less asset cost. How is debt accounted for by lessor in a direct finance lease? ๐ธ๐ธ : Debt incurred by lessor to acquire equipment remains on the balance sheet as long term liability How is Unearned Income accounted for on the Lessor Income Statement? ๐ธ๐ธ : Unearned income is amortized over the lease term so as to produce a constant periodic rate of return on the net investment.
5.) Future minimum lease payments for each of the next five years 6.) Amount of unearned income included in income to offset initial direct cost charged against income for each period income statement presented 7.) Total contingent rental included in income for each period income statement presented How should a Lessor account for an Operating Lease on its balance sheet? ๐ธ๐ธ : 1 .) lease property is capitalized as cost under "investment in leased property", 2.) Leased property is depreciated straight-line over the lease term, down to the residual value How should a Lessor account for an Operating Lease on its income statement? ๐ธ๐ธ : Rental income is recognized on operating leases in the period the payment is a receivable. If payments are not level (increasing or decreasing) they are recorded on a straight-line basis unless the alternative payment is more representative of property usage What are a lessor's required financial disclosures regarding operating leases? ๐ธ๐ธ : 1 .) a general description describing leasing arrangement 2.) The cost (or carrying amount) of the property being leased 3.) Min. future rentals as of the balance sheet date and for each of the succeeding five years. 4.) Total contingent rentals How may Lessor and Lessee testASC 840 differently?
๐ธ๐ธ : 1 ) may use different implicit rates to calc 90% FMV test 2.) Lessor includes residuals guaranteed by third parties and lessee does not when calc 90% FMV test How should the lessee record a capital lease on its balance sheet? ๐ธ๐ธ : 1 .) as an asset and an obligation; 2.) the obligation should be recorded at the lower of r value: i.) PV of stream at the beginning of the stream (exclude executory cost) ii.) the fair value of leased property How should the lessee record a capital lease on its income statement? ๐ธ๐ธ : During each lease term, each minimum payment shall be allocated between a reduction of obligation and interest expense. What should a lessee's financial statement disclose regarding a capital lease? ๐ธ๐ธ : 1 .) gross amount of asset 2.) future min. lease payments as of the date of the balance sheet and each succeeding five years (exclude executory costs and profit) 3.) total contingent payments 4.) asset and related accumulated depreciation 5.) related obligation with classification into current and non current liabilities
๐ธ๐ธ : 1.) Revenue and expense are recognized in the period in which service is performed or goods are delivered, regardless of when payment is made. 2.) Matching of revenues and expenses What is cash basis accounting? ๐ธ๐ธ : Revenues and expenses are recorded when cash is received or paid. What is tax basis accounting? ๐ธ๐ธ : The preparer uses tax rules to dictate the recording of income and expense items, which may differ from the respective financing accounting methods What are the benefits of accrual basis accounting? ๐ธ๐ธ : 1 .) report a company revenue/expenses for a particular period of time 2.) report a company assets/liabilities for a particular period of time 3.) Provide insight into liquidity, leverage and allow insight as to whether they can accommodate more debt. What are the shortcoming of cash basis accounting? ๐ธ๐ธ : 1 .) may understate liabilities on balance sheet 2.) may overstate income on income statement
3.) not ideal for credit decisions What are the three levels of assurance provided by financial statements? ๐ธ๐ธ : 1 .) compiled 2.) reviewed 3.) audited What are compiled financial statements? ๐ธ๐ธ : Present management's representations in financial statement format. The prepairer is not to verify accuracy of the information presented What are reviewed financial statements? ๐ธ๐ธ : Provide an additional level assurance. The accountant reviewed report offers reasonable assurances that there a no material modifications that should be made to the financial statements in order for them to conform with GAAP. Preparer of reviewed statements conduct various procedures, including ratio analysis and company interviews. What is an audited financial statement? ๐ธ๐ธ : 1) Provide the greatest level of assurance. An unqualified auditor's report purports that the financials are presented fairly, in all material aspects, the financial position of the company. 2.) Include test audits.
๐ธ๐ธ : Report Income minus expenses for a specific period of time. How can financial statements be used to manage? ๐ธ๐ธ : 1.) Review statements over different periods of time can help management to see trends, strengths and weaknesses. 2.) Reviewing financial statements over longer period time, underwriters can better assess credit risk. Describe a key element to understanding a balance sheet. ๐ธ๐ธ : 1 .) Assets - Liabilities = Equity 2.) any increase or decrease on one side of the equation always creates a corresponding entry on the other side of the equation What is a Heading? ๐ธ๐ธ : Regarding elements of a balance sheet, the name of the business, type of statement and dd/mm/yyyy shown at the top. What are Assets? ๐ธ๐ธ : Regarding elements of a balance sheet, anything of value that is owned or legally due to the business. Assets are separated into categories; current assets, fixed assets and other assets.
What are current assets? ๐ธ๐ธ : Regarding elements of a balance sheet, cash and liquid assets that can be converted to cash within a 12 month period. What are Accounts Receivable? ๐ธ๐ธ : Regarding elements of a balance sheet, a current asset representing the amount due from customers for payment of services or merchandise What is Inventory? ๐ธ๐ธ : Regarding elements of a balance sheet, a current asset including raw materials, work in process, and finished goods either manufactured or purchased for resale. What are Marketable Securities? ๐ธ๐ธ : Regarding elements of a balance sheet, a current asset consisting of interest or dividend- yielding holdings expected to be converted to cash within a year. Also called short term investments including stocks, bonds, CD's and time deposits. Listed at their original cost. What are Prepaid Expenses? ๐ธ๐ธ : Regarding elements of a balance sheet, a current asset consisting of goods, benefits or services a business buys or rents in advance of use. Supplies, insurance and office rent are some examples
What is Short-Term Notes? ๐ธ๐ธ : Regarding elements of a balance sheet, a current liability consisting of balance due to pay off short term debt for borrowed funds. What is Current Portion of Long Term Debt? ๐ธ๐ธ : Regarding elements of a balance sheet, a current liability consisting of the portion of debt that is payable within the next 12 months. What is Interest Payable? ๐ธ๐ธ : Regarding elements of a balance sheet, a current liability consisting of any accrued fees due for use of both short term and long term borrowings. What is Taxes Payable? ๐ธ๐ธ : Regarding elements of a balance sheet, a current liability consisting of amounts estimated by an accountant to have been incurred during the accounting period. What is Accrued Payroll? ๐ธ๐ธ : Regarding elements of a balance sheet, a current liability consisting of salaries and wages currently owned. What are Long-Term Liabilities?
๐ธ๐ธ : Regarding elements of a balance sheet, liabilities consisting of notes, contract payments or mortgage payments due over a period exceeding 12 months. What is Equity? ๐ธ๐ธ : Regarding elements of a balance sheet, also called net worth, equity is the claim of the owner(s) on the assets of the business. What is Capital Stock? ๐ธ๐ธ : Regarding elements of a balance sheet, equity consisting of the total amount invested in the business in exchange for shares of stock at values up to the par value. What is Excess Paid In Capital? ๐ธ๐ธ : Regarding elements of a balance sheet, equity consisting of the amount in excess of par value that a business receives from share of stock sold. What is Retained Earnings? ๐ธ๐ธ : Regarding elements of a balance sheet, equity consisting of the total accumulated net income minus the total accumulated dividends since the company's founding. What is Total Liabilities and Equity?
