Fall 2008 – Exam 1 – Study Guide for Acct 414 What you DO need to understand about leases: 1. You need to know the BASIC rules (first page of MSWord file that had the journal entry examples - or those 2 flow charts from ppt) in order to classify leases. There won't be any nonrenewal penalties, guarantees of lessor's debt by lessee, etc. or other complications like used property – those are research questions and not things anyone sets out to memorize. 2. You need to know the five indicators under IFRS and be able to explain why the classification might be different than it is under US GAAP. There are no examples of this on old exams but we practiced a lot on Project 1 and 2. 3. An unguaranteed residual value is NEVER part of the minimum lease payments (lessor or lessee) but a guaranteed residual value is included (in both lessor and lessee if guaranteed BY the lessee and just in lessor's MLP if guaranteed by a 3rd party). 4. The lessor's amortization table starts with fair market value of the asset if it is a sales type lease 5. The lessor's amortization table starts with fair market value of the asset PLUS initial direct costs if it is a direct financing lease 6. How to find the PVMLP for general situations (e.g., title transfer, bargain purchase options, etc.) - so what are the cash flows and which interest rate to use. 7. How to find the interest rate implicit in a lease (same basic computation you need to know to find the debtor's implicit rate used in a troubled debt restructuring in which the total cash flows exceed the carrying value. 8. You need to be able to make the journal entries for the lessee (operating and capital) and know what useful life over which to amortize the leased asset (useful life if title transfer or BPO, otherwise lease term) 9. You need to know how to do the lessor's journal entries for an initial direct cost (different for each type of lease) 10. You need to be able to do the journal entries for a sales type lease when there is an unguaranteed residual value and for a direct financing lease and for an operating lease. 11. You should know definitions of initial direct costs and executory costs and know what to do with them for each type of lease. In other words, IDC affects lessor only, executory costs are subtracted from lease payment but ONLY when paid by the lessor. However, I’ve never given a problem with executor costs so this would be a topic for a multiple choice exam but not the exam I’ve prepared. On the other hand, I may well have initial direct costs in a problem! Other topics: You should know how to record a serial bond including year-end interest accruals - using the effective interest method and the bonds outstanding method (I might give you a choice but I might ask for one or the other or both) There will be at least one problem on troubled debt restructuring which will require selected journal entries for creditor (but not for the debtor). You need to know how to find the present value of the cash flows to determine the restructured receivable for the creditor – always use the original interest rate. I'll throw in a few present value problems similar to first homework assignment but some of them will be related to leases and/or troubled debt situations similar to Quiz 1. In all problems, you need to "think like an accountant" and be aware of the need to do year-end accruals of interest, depreciation, etc. Fair value option problem will be similar to the one on the slides. In other words, I’ll ask for balance sheets one year later (as compared to the homework) so you have to consider interest revenue and interest expense. Practicing on old exams is very helpful – just remember that this exam will NOT cover debtor accounting in troubled debt situations and long-term construction contracts. It does have NEW content – primarily leases under IFRS and fair value option. We also covered the fair value option and loan impairments under IFRS but the accounting was essentially the same so I don’t have question on how it differs from US GAAP.