FAR CH 5 - FAR - Notes Chapter 5 http:/cpacfa.blogspot.com...

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FAR - Notes Chapter 5 http://cpacfa.blogspot.com Present Value and Annuities Ordinary Annuity – start at end of period (also called arrears) Annuity Due – payments start at beginning of year On the present value table: Annuity due – 1 = ordinary annuity On the PV table: Ordinary annuity + 1 = annuity due Present value of $1 – used for capital lease buyout at end of lease (bargain purchase buyout); bond principle payoff at end Future value of $1 – used bank savings account Present value of an Ordinary annuity – used for periodic lease payments, periodic bond interest payments Future Value of an Ordinary annuity – investment an in IRA PV and FV of annuity due Accounting for Leases Operating lease – Rental agreement Lessee accounting – the renter The lessee records rent expense over the lease term, usually straight line Rent Exp xx Cash/rent payable xx Lease bonus (prepayment) for future expenses (real estate agent cost) is a deferred asset and amortized over the life of the lease Leasehold improvement – one permanently affixed to the property and reverts back to the lessor at end of lease - Should be capitalized as added to PPE - Should be depreciated/amortized over the lesser of: - Lease life - Asset/improvement life Premium rent payments required for specific events are a period expense - renter has to pay additional amount if sales exceed a certain threshold Non-refundable security deposit – capitalized by the lessee as prepaid rent expense Refundable security deposit – reported as a receivable until refunded by the lessor Free or reduced rent – free months must be allocated evenly over lease term Lessor accounting – the owner The cost of the property is included on the lessors books, PPE Depreciate over the assets useful life Cash/rent receivable xx Rental income xx Non-refundable security – booked as unearned revenue until the lessor considers the deposit earned Refundable security – treat as a liability by the lessor until the deposit is refunded 1
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FAR - Notes Chapter 5 http://cpacfa.blogspot.com The CPA exam tries to trick you into recognizing security deposits as revenue in advance of being earned by giving information in the question about the historical percentage of security deposits earned. Don’t be fooled into recognizing it early Capital Lease – purchase/ownership Lessee capital lease criteria – must meet one condition to capitalize (consider a capital lease) O O wnership transfers at end of lease (upon final payment or required buyout) W W ritten option for bargain purchase N N inety % (90%) of leased property FMV is less than or equal to P.V of lease payments S S eventy-five (75%) or more of asset economic life is being committed in lease term If the lessee OWNS the asset in one aspect they need to capitalize it Lessor – seller; sales type/direct financing criteria; must meet all 3 L L essee OWNS the leased property U U ncertainties do not exist regarding any unreimbursable costs to be incurred by the lessor
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FAR CH 5 - FAR - Notes Chapter 5 http:/cpacfa.blogspot.com...

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