Financial 5 (Leases, Liabilities and Bond)

PRESENT VALUE AND ANNUITIES Ordinary Annuity vs. Annuity Due Ordinary Annuity in Arrears, payments made at the end of each period Annuity Due Annuity in Advanced, payments occur at beginning of each period ACCOUNTING FOR LEASES

Lessee Accounting Leasehold improvements Capitalize Lesser of: o 1) Lease life o 2) Asset life Lease Bonus (prepayment) o Classify as an asset (deferred charge) and amort. using straight-line method over life

Lessor Accounting Security Deposit o Non-Refundable defer by lessor and capitalized by lessee (prepaid rent) until lessor considered the deposit earned Refundable o Treat as receivable by lessee and a liability by lessor until deposit refunded to lessee

Lessee Capital Lease (US GAAP)

Lessee Capital Lease (IFRS)

Lessor Sales Type / Direct Financing (US GAAP)

Must meet all 3 criteria

Sales-Type ( 2 Profits ) o 1) Gain on Sale, and 2) Interest Income Direct Financing ( 1 Profit ) o Interest Income Lessee Capital (Finance) Lease Accounting Recording the Lease o Lessee records lesser of: 1) FV of asset at inception 2) Cost = PV of min. lease payments o Interest rate lesser of: 1) Implicit rate in the lease (if known) 2) Lessees incremental borrowing rate (rate avail. in the mkt to the lessee) Lessor Sales-Type (Finance) Lease Accounting

Lessor Direct Financing (Finance) Lease

Cost = Carrying Value o No Sale & No COGS Sale-Leaseback Excess Profit on Sale-Leaseback (US GAAP)

Deferred Gain

ASSET RETIREMENT AND ENVIRONMENTAL OBLIGATIONS Asset Retirement Obligations (ARO) ARO is the obligation (liab.) associated w/ the retirement of tangible long-lived assets Asset Retirement Cost (ARC) ARC is the amount capitalized (asset) that increases the carrying amount of the long-lived asset when a liab. for an ARO is recognized

Subsequent Measurement

LONG-TERM LIABILITES AND BONDS PAYABLE Bonds FV bodnd o 1) PV of future interest payments @ market rate o 2) PV of principal @ market rate Discount o State Rate (coupon rate) < Market Rate (effective rate) Premium o State Rate (coupon rate) > Market Rate (effective rate) Bond Issue Cost (J/E)

Bond Premium J/E

Bond Discount J/E