ACC 232 1st EditionExam # 4 Chapters 21 and 22Chapter 21Leases-gives ownership rights without the actual ownership, and the actual debt associated with the property to the lesseeAdvantages of Leasing:1. Guaranteed payment2. Guaranteed residual valueCapital Leases-Need one of the following 4 criteria:1. Ownership transfers at the end of the lease2. Bargain purchase at the end of the lease3. Lease payment is equal to or greater than 90% of the fair market value of the property (PC of the lease payment)4. Life of the lease is 75% of the life of the asset5. If it doesn’t meet at least 1 of the above material then it is an operating leaseKnow how to record journal entries for both lessor and lessee for capital and operating leasesExecutory costs-maintenance, property, supplies-If it is included in the lease payment, then we subtract it off for the present value calculationKnow when to use the PV of annuity and annuity due tables, and without the tablesThe discount rate used to calculate the annuity is based on our discount rate, unless we know that the lessor uses and it is lowerBargain purchase, or a guaranteed value at the end, needs to be included.Know how to make the annuity tables and journal entries from lessee point of view.Lessor accounting:1. if the lessor buys the equipment and leases to us, then it is a financing lease2. manufacture or buy the equipment for less than the lease, sales-type lease3. know how to journalize bothProblems to Know:E 21-2 Lease with Guaranteed Residual ValueE 21-3 Lessee entries, executory costs, unguaranteed residual valueE21-10 annuity dueE 21-6 Sales type leaseChapter 22Changes in accounting principles, estimates, and entitiesChange in accounting principal examples: changing from completed contract to % of completion methods, changing inventory methods- Requires restatement of prior financial statements- Statement of retained earnings will show the cumulative effect of a change in accounting principle, net of taxChanges in accounting estimates examples: % of bad debts, life of assets for depreciation- Prospective changes- the new financial statements will use these estimates, and there will be no change in prior statements- periods benefited from deferred costs- liabilities for warranty costs- changes in depreciation live, salvage values, and methodsAccounting errors- math errors, failure to record revenues or expenses, and assets and liabilities, capitalizing expense into assets, misclassifying balance sheet items(current and noncurrent), treated retrospectively, and cause restatement of financial statements- not recognizing expenses, in the wrong period- not recognizing revenues, in the wrong period- misclassification-put non-current assets or liabilities in current assets or liabilities- stockholder’s equity-incorrect accounting for options and warrants- long-lived assets-not recording asset impairments- taxes-revenues incorrect recognized for tax purposes creating tax calculation errors- errors must be corrected and the financial statements restated- Indirect effects: changes in future cash flows are shown in those future yearsChanges to and from the equity method for accounting for investmentsChanges from the equity method:- equity method of accounting-we record our share of the income of the company we are invested in- we subtract dividends paid from the investment accountChanges in the fair value method:- investments in available for sale securities or trading securities- cost basis is the carrying amount of the investment under the equity method- unrealized gain or loss is calculated based on this cost basisLiquidating dividend: dividends in excess of earnings by a company- recorded as a reduction in the carrying amount of the investmentChanges to the equity method-retrospective application- The earnings and dividends from the beginning of our investment will be recorded in the previous periods- We will eliminate any unrealized holding gains and losses and the fair value adjustment accountsProblems to know:E 22-8E 22-14E 22-17P