[jeff]

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Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[ZSRizvi]

@dante

The other option to determine deferred gain is you look at the useful life of the asset and the lease of the term.

Since the lease is for 12 years and the asset's useful life is 15 years that means 80% of the asset life will be consumed which satisfies the “75%” capital lease rule.

Which means that the lessee retains substantially all the rights and so the entire profit (gain) of $120,000 must be deferred.

Hope I've helped. 🙂

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

@dante

The other option to determine deferred gain is you look at the useful life of the asset and the lease of the term.

Since the lease is for 12 years and the asset's useful life is 15 years that means 80% of the asset life will be consumed which satisfies the “75%” capital lease rule.

Which means that the lessee retains substantially all the rights and so the entire profit (gain) of $120,000 must be deferred.

Hope I've helped. 🙂

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[NYCaccountant]

Are you sure ZSRizvi? I thought deferred gain only comes into play when you sell equipment and immediately lease it back.

It would be two distinct transactions, with the first transaction being the sale and the second the transaction being the lease.

I thought that the threshold for deferral of gains is 90% or more, and 10-90%. If the present value of the lease payments is more than 90% of the fair value of the equipment, than the gain is deferred and recognized as an adjustment against depreciation expense. if the present value of the lease payments are between 10-90% then the deferred gain equals the present value of the lease payments, and the recognized gain would be the excess.

If the present value of the lease payments is less than 10% of the fair value of the equipment then you would recognize the entire gain because all the risk and rewards of ownership have essentially been transferred. Am I wrong? somehow I think thats how it should be accounted for.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[NYCaccountant]

Are you sure ZSRizvi? I thought deferred gain only comes into play when you sell equipment and immediately lease it back.

It would be two distinct transactions, with the first transaction being the sale and the second the transaction being the lease.

I thought that the threshold for deferral of gains is 90% or more, and 10-90%. If the present value of the lease payments is more than 90% of the fair value of the equipment, than the gain is deferred and recognized as an adjustment against depreciation expense. if the present value of the lease payments are between 10-90% then the deferred gain equals the present value of the lease payments, and the recognized gain would be the excess.

If the present value of the lease payments is less than 10% of the fair value of the equipment then you would recognize the entire gain because all the risk and rewards of ownership have essentially been transferred. Am I wrong? somehow I think thats how it should be accounted for.

FAR - 93
REG - 87
BEC - 84!!!!
AUD - 99!!!!!! CPA exam complete.

[ZSRizvi]

@NYC

I came across similar problems in the Becker HW problems and that's how they showed us to do it. If you're not given the minimum lease payments (which seems to be the case in this probem), then you have to “infer” the lease payments from the other information given.

In this problem, it says that the company will lease the asset for 12 years out of its useful life of 15 years. I just did the module on leases for Becker and a similar problem only gave the carrying value, selling price, and lease/asset life information. It said to use the lease term to determine whether there should be a deferred gain or not.

It also says in the Becker book that minimum lease payments = 90% of the FV is accounting for as a capital lease; the 10-90% can be operating or capital and below 10% is operating.

Buuut, I could be wrong. How else would you solve this problem though? There isn't enough information apart from the lease term given?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

@NYC

I came across similar problems in the Becker HW problems and that's how they showed us to do it. If you're not given the minimum lease payments (which seems to be the case in this probem), then you have to “infer” the lease payments from the other information given.

In this problem, it says that the company will lease the asset for 12 years out of its useful life of 15 years. I just did the module on leases for Becker and a similar problem only gave the carrying value, selling price, and lease/asset life information. It said to use the lease term to determine whether there should be a deferred gain or not.

It also says in the Becker book that minimum lease payments = 90% of the FV is accounting for as a capital lease; the 10-90% can be operating or capital and below 10% is operating.

Buuut, I could be wrong. How else would you solve this problem though? There isn't enough information apart from the lease term given?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Anonymous]

ZSRizvi, thanks, that makes sense. I don't see how else they could have come to that conclusion. I figured that's what the rationale behind it is but I just can't find it anywhere in my notes that you can infer it from that. It only talks about the 90/10 rule.

[Anonymous]

ZSRizvi, thanks, that makes sense. I don't see how else they could have come to that conclusion. I figured that's what the rationale behind it is but I just can't find it anywhere in my notes that you can infer it from that. It only talks about the 90/10 rule.

[Anonymous]

@ ZSRizvi

Regarding that depreciation question from page 1…IDK if you figured it out but I just did it and got $50,000.

It was purchased July 1, year 1 with a 6 year useful life. That is 72 months. The impairment happened in Jan, year 4. That means 30 months of depreciation has passed. The last 6 months of the first year, year 2, and year 3. So there are 72-30 months left, or 42 months remaining (or 3.5 years). So…$70,000/42 months is $1666.67 * 12 = $20,000 depreciation expense for year 4. Or just the $70,000/3.5 to get the 20,000. Thinking of it in terms of months sometimes helps me not to make mistakes with half year stuff. Does that help?

[Anonymous]

@ ZSRizvi

Regarding that depreciation question from page 1…IDK if you figured it out but I just did it and got $50,000.

It was purchased July 1, year 1 with a 6 year useful life. That is 72 months. The impairment happened in Jan, year 4. That means 30 months of depreciation has passed. The last 6 months of the first year, year 2, and year 3. So there are 72-30 months left, or 42 months remaining (or 3.5 years). So…$70,000/42 months is $1666.67 * 12 = $20,000 depreciation expense for year 4. Or just the $70,000/3.5 to get the 20,000. Thinking of it in terms of months sometimes helps me not to make mistakes with half year stuff. Does that help?

[Monir]

Bake Co.'s trial balance included the following at December 31, Year 1:

Accounts payable $ 80,000

Bonds payable, due Year 2 300,000

Discount on bonds payable 15,000

Deferred income tax liability 25,000

The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in Year 2. What amount should be included in the current liability section of Bake's December 31, Year 1, balance sheet?

A. $395,000

B. $390,000

C. $365,000

D.$420,000

Explanation

Choice “b” is correct. All of the items listed will be included in the current liabilities section of Bake's December 31, Year 1 balance sheet. Accounts payable are current liabilities. The bond payable, less the discount, is classified as a current liability because it will be paid in the next operating period. The deferred tax liability is classified as current because it is not related to an asset and will reverse during the next operating period. Total current liabilities are calculated as:

Accounts payable $ 80,000

Bonds payable 300,000

Bond discount (15,000)

Deferred tax liability 25,000

Total current liabilities $ 390,000

I have no clue why Bonds discount was subtracted from C/L . Any one has better explanation. I am thinking this way, if a company issue a bond less than it's face value , don't they have to pay when it's mature and how come discount is not included .

Thanks

[Monir]

Bake Co.'s trial balance included the following at December 31, Year 1:

Accounts payable $ 80,000

Bonds payable, due Year 2 300,000

Discount on bonds payable 15,000

Deferred income tax liability 25,000

The deferred income tax liability is not related to an asset for financial accounting purposes and is expected to reverse in Year 2. What amount should be included in the current liability section of Bake's December 31, Year 1, balance sheet?

A. $395,000

B. $390,000

C. $365,000

D.$420,000

Explanation

Choice “b” is correct. All of the items listed will be included in the current liabilities section of Bake's December 31, Year 1 balance sheet. Accounts payable are current liabilities. The bond payable, less the discount, is classified as a current liability because it will be paid in the next operating period. The deferred tax liability is classified as current because it is not related to an asset and will reverse during the next operating period. Total current liabilities are calculated as:

Accounts payable $ 80,000

Bonds payable 300,000

Bond discount (15,000)

Deferred tax liability 25,000

Total current liabilities $ 390,000

I have no clue why Bonds discount was subtracted from C/L . Any one has better explanation. I am thinking this way, if a company issue a bond less than it's face value , don't they have to pay when it's mature and how come discount is not included .

Thanks

[ZSRizvi]

@dante

Yeah, I figured out afterwards; I'm used to whole numbers when calculating depreciation so the fact that they threw in that “.5” messed with me. I really need to start reading the questions properly. Problem is, I try to do them fast because I know that on exam day I won't have the luxury of spending 5-10 minutes on a problem. Hence the abundance of mistakes. -.-‘

@Monir

That is a good question. I know I ran across that problem and, to be honest, I'm still trying to figure out why the discount is subtracted.

Anyone else know why?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

@dante

Yeah, I figured out afterwards; I'm used to whole numbers when calculating depreciation so the fact that they threw in that “.5” messed with me. I really need to start reading the questions properly. Problem is, I try to do them fast because I know that on exam day I won't have the luxury of spending 5-10 minutes on a problem. Hence the abundance of mistakes. -.-‘

@Monir

That is a good question. I know I ran across that problem and, to be honest, I'm still trying to figure out why the discount is subtracted.

Anyone else know why?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Monir]

Same here man ! It's so confusing

[Author]

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