12 final notes chapters 8 12 fall 2013 capital lease

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Unformatted text preview: $5,000,000 Bonds Sold at a Discount Proceeds on sale – Dr. Cash $4,806,939 – Cr. Bonds payable (Net of Discount) $4,806,939 Pay interest on a semi annual basis – Dr. Interest expense $244,306 – Cr. Bonds Payable(Bond discount) $ 19,306 – Cr. Cash $225,000 Pay principal at maturity – Dr. Bonds payable $5,000,000 – Cr. Cash $5,000,000 Bonds Sold at a Premium Proceeds on sale – Dr. Cash $5,202,753 – Cr. Bond Payable (Bond premium) $ 202,753 – Cr. Bonds payable (net of premium) $5,000,000 Pay interest on a semi annual basis – Dr. Interest expense $204,725 – Dr. Bond Payable (Bond discount) $ 19,306 – Cr. Cash $225,000 Pay principal at maturity – Dr. Bonds payable $5,000,000 – Cr. Cash $5,000,000 Presentation CICA 3855 requires all financial liabilities (and assets) to recorded at fair value The discount/premium is inherent in the fair value measurement using the effective interest rate method The fair value will be the carrying value so the discount/premium will not be shown separately Subsequent measurement will depend on the classification of the financial instrument Accruing Interest Year end adjustment required Must match interest cost to period Interest payable is a current liability Early Retirement of Debt Market value of long- term debt may differ from book value Can purchase debt on open market for less than book value Must eliminate debt premium or discount Jessica Gahtan ACTG2011 Page 11 Final Notes Chapters 8- 12 Fall 2013 An Example - Mortgages Usually require a blended payment of interest and principal On each payment date, payment is divided between interest and principal Over life of mortgage, entire principal is repaid Interest expense is recorded each payment period Fair Value of Debt Accounting does not reflect real economic gains or losses Disclosure of market value of debt required Leases Method of financing use of an asset Contractual obligation for lessee to pay lessor Can be considered “off- balance- sheet- financing” Two types of leases Operating lease Capital/finance lease Different accounting depending on type of lease Determining Type of Lease Capital lease if: – Title passes to lessee at end of lease – Most economic benefit used during lease – Present value of lease payments equals most of fair value of asset PE- GAAP quantitative guidelines IFRS application of greater judgment Operating Lease Lessor retains full ownership Lease expense is recorded each period Obligation disclosed in notes Leases Jessica Gahtan ACTG2011 Page 12 Final Notes Chapters 8- 12 Fall 2013 Capital Lease Treat as if lessee purchased...
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This note was uploaded on 03/28/2014 for the course ACTG 2011 taught by Professor Alexgarber during the Fall '11 term at York University.

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