# Business Administration 2257 Study Guide - Final Guide: Finance Lease, Preferred Stock, Retained Earnings

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13 Aug 2016
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BUS 2257
Notes on Topic Slides
MANUFACTURING INVENTORIES
Raw Materials
Determine CORMAFU (T/B) and E/B (generally given) in RM
Calculate CORMU (plug) and debit to WIP
Work in Process
Includes all product costs, which fall into three categories:
oRM – raw materials
oDL – direct labor
Determine COWIP (T/B) and E/B in WIP (pRM + pDL + pFOH)
opRM = GIVEN
opDL = GIVEN
opFOH = (Partial Proxy/Total Proxy) x Total
FOH
Calculate COFGM (plug) and debit to Finished
Goods
Finished Goods
COFGM is debited to Finished Goods
Determine COGAFS (T/B) and E/B in Finished
Goods [(COGAFS/UAFS) x E/I (units)]
Calculate COGS (plug) and debit to COGS Expense
FINANCE AND OPERATING LEASES
Lessor & Lessee
Lessor = party providing the asset
Lessee = party making payments for the use of the asset (this is our focus)
Operating Leases
Does not transfer substantially all the risks and rewards incidental to ownership
Treated as an expense:
DR Lease Expense
CR Cash/Accounts Payable/Prepaid Lease
Finance Leases
Transfers substantially all the risks and rewards incidental to ownership
Criteria:
oReasonably certain the asset will be transferred or purchased by the lessee at the end of the lease
oThe lease duration extends for the majority of the asset’s economic life so that the lessee will receive most
of the economic benefit
oAt the inception of the lease, the present value of the lease payments equal substantially all of the value of
the asset
oThe leased asset is so specialized that only the lessee can use it without modification
Treated as an asset with a liability:
DR Asset under lease
CR Lease Obligation
Equal to FV of the leased property or the PV of the minimum lease payments
Must calculate the PV of the lease payments because of the time value of money
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Time Value of Money
A dollar today is worth more than a dollar in the future, because money now has the opportunity to earn a financial
return (if invested)
To find the BV of an asset under a finance lease, we must present value all of the future lease payments
Table 1 – used to calculate the present value of a lump-sum payment
Table 2 – used to calculate the present value of equal reoccurring payments (annuity)
n = number of periods remaining in the lease
i = interest rate (also known as the implicit borrowing rate, the discount rate, or the cost of capital)
The value of the asset leased is found by taking into account the total cost of the lease (sum of future lease
payments)
Calculating Fair Value of Lease
(1) Take the value of one lease payment
(2) Calculate the number of payment dates
(3) Use the implicit rate as i and n-1 in the present value of annuities table to find the PV factor
(4) Multiply the PV factor by the value of one payment
(5) Add the value of one payment to the amount found in step 4 (PV of future payments)
DR Asset under lease
CR Lease obligation
Accounting for Finance Leases at FYE
(1) Accrue Interest = Net Lease Obligation x i x (n/12)
DR Interest Expense
CR Interest Payable
(2) Depreciate the asset
DR Depreciation expense
CR A/D Asset under lease
Accounting for Lease Payments
On payment date:
DR Lease interest payable
DR Lease interest expense
DR lease obligation
CR Cash
STOCKS
Common Stocks
Basic type of stock
Voting, dividend, and liquidation payment rights
Preferred Stock
Preferred with regards to dividends
Cumulative dividend rights
In the event of bankruptcy, first claim to company assets
No voting power
Can be callable/redeemable
Some have a convertible feature
\$5.50 Cumulative, convertible, non-callable, no par value, preferred shares
o\$5.50 = dividend rate
oCumulative = dividends are owed each year, even if they are not paid
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