int acct ii exam 2

advantages of leases

• complete financing - no security deposit, lessee keeps assets and cash

• lessor bears risk

• business and financial flexibility

• tax benefits - equipment interest payments are tax deductible, building lease payments are tax deductible

disadvantages of leases

• overall cost of asset is higher when leasing

• loss of ownership

Right of Use Asset valuation

RoU = Lease Liability + prepaid lease payments + initial direct costs - lease incentives

lease liability valuation

lease liability = PV of lease payments + PV of guaranteed residual value

group 1 criteria

used by lessees and lessors

• transfer of title

• purchase option

• lease term = at least 75% of asset life

• PV of lease is 90% of FV of asset

• specialized nature

lessee - financing

lessor - sales type

group ii

only lessor

• PV of lease paymets + guaranteed residual value = FV of asset

• probably that there will be lease payments + any amount to guarantee residual value

lessor - direct financing

journal entry at inception/commencement

dr. RoU

dr. Lease Incentive Liability

cr. Prepaid Lease Payment

cr. Initial Direct Costs

cr. Lease Liability

dr. Lease Liability

cr. Cash

operating lease

lessee amortization of RoU = ](annual payments * years + initial lease payment + initial direct costs - lease incentive)/ # of years ] - interest expense

dr. Lease Expense

dr. Lease Liability

cr. Cash

cr. Accumulated Amortization - RoU

lessor - doesn’t remove asset from books

dr. Cash

dr. Initial Direct Costs

cr. Rent Revenue

cr. Prepaid Initial Direct Costs

finance leases - lessee

amortization of RoU = straight line expense

dr. Amortization Expense - RoU

cr. Accumulated Amortization - RoU

sales type - lessor

first:

dr.net investment in lease = PV of lease payments

dr.cogs

cr.sales rev

cr.inventory

second:

dr. Cash

cr. Interest Rev.

cr. NIL

effective tax rate

effective tax rate = income tax expense / book income before taxes

income tax expense

income tax based on books/financial statements

income tax expense = (income before taxes/revenue - book basis) * tax rate

book basis - the amount of income actually on the books

income tax payable

income tax that is actually due based on taxable income

income tax payable = (income before taxes/revenue - tax basis) * tax rate

tax basis - cash basis, what has actually occured transactionally

permanent difference

scope differences - items only in book income OR tax income NEVER BOTH

causes statutory and effective tax rate to differ

permanent differences: book income > tax income

municipal interest income (tax free income)

dividends received deduction

life insurance death proceeds

proceeds/income that IRS ignores which make book income higher

permanent differences: tax income > book income

fines and penalties

certain meal/entertainment expenses

life insurance premium plans

expenses that IRS ignores makes taxable income higher

deferred tax liability

tax basis of asset < book basis of asset

tax basis of liability > book basis of liability

deferred tax asset

tax basis of asset > book basis of asset

tax basis of liability < book basis of liability

DTA from

unearned revenues

contingent liability

bad debt expense

warranty liability

future reductions in taxes needed to be paid

DTL from

installment sales

depreciation

goodwill

equity method investments

income tax payable that’re due in the future

valuation allowance DTA journal entry

dr. income tax expense

cr. valuation allowance for DTA

= DTA * % not realized

changes in tax rates - DTAs

DTA = sum of amount of difference reversing each year * respective income tax rate

sum of amount of difference reversing each year = difference/years

dr. Income tax expense

dr. DTA

cr. Income taxes payable

reversal entries

dr. Income Tax expense

dr. DTL

cr. DTA

cr. income tax payable

net operating loss

tax deductions > taxable revenues

NOL: carryback

offset to prior 2 years (unless otherwise specified)

dr. income tax refund receivable

cr. income tax benefit

= carryback amounts * tax rates

NOL: carryforward

yr 1 = income loss * rate = tax benefit

dr. DTA

cr. Income Tax Benefit

yr 2 = loss carried to year 2 and subtracted from taxable income * tax rate = income tax payable

dr. income tax expense

cr. DTA = income loss * rate

cr. income tax payable

employee stock options

call options where employee has the right to purchase company stock at a fixed price

stock awards

stock appreciation rights (SARs) and restricted stock awards

equity classified awards/stock options accounting

compensation expense = (# of options or shares - forfeitures) * fv of shares

dr. cash = number of shares * exercise price

dr. apic stock options = compensation expense

cr. common stock par = shares * par

cr. apic in excess of par

equity classified vs liability classified awards

equity - employees has right to receive equity shares, measure total compensation expense based on FV

liability - employee receives cash based on market value of shares in plan

stock appreciation rights (SARs)

compensation expense =( FV * number of rights ) percent vested - past acrrued expense

dr. compensation expense

cr. obligation under sar plan (if cash) / apic sars (if common stock)

restricted stock plans

awarded shares in name of a specific employee

dr.deferred compensation - reestricted shares = # of shares * market price

cr. common stock - par value

cr. apic excess of par

every vesting year

dr. comepsnation expense

cr. deferred compensation - restricked stock = defered comepsnation amount / # of vesting years

termination

dr common stock par

dr apic in excess

cr deferred compensation

cr compensation expense

employee stock purchase plan - non compensatory vs compensatory

non compensatory = plan is available to all employees, plan is established for max of 1 month, discount not larger than 5% of open market price

non compensatory accounting

the same as issuing in open market

dr. cash

cr. common stock - par

cr. apic excess of par

compensatory acounting

dr cash = market price * # of shares x 1-discount%

dr salary exense = market price * # of shares x discount%

cr common stock par

cr apic in excess

pension plan

income to former/retired employees

contributory pension plan

employees fund some or all pension benefit costs, can contribute more to have better benefits

non contributory pension plan

employer. responsible for funding the total cost

pension trust

separate entity from company that sets aside money for future pension benefits

defined contribution plan

employer has a fixed amount they contribute each period

• typically a % of employee’s salary

• employer not responsible for value of pension fund asset

  • employee determines the type of investment held in plan

defined benefit plan

predetermined amount in pension

• contributions vary but benefit is fixed

• employer bears risk of loss

• defined benefit = % x salary level x credits for years of service

pension plan assets

fair value of assets intended to cover future pension obligations

pension plan obligation

present value of expected benefit payments

vested benefit obligation

vested only, current salaries

accumulated benefit obligation

vested and unvested, current salaries

projected benefit obligation

vested and unvested, future salaries