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Bonds Issued at Par (FV= 1mln; r=10%) DR Cash 1,000,000 (date of issuance) CR Bonds Payable 1,000,000 DR Interest Expense

8,333.33 (interest accrual) CR Accrued IntPayable 8,333.33 (100,000/12) DR. Accrued Interest Payable 100,000 CR. Cash 100,000 (annual int payment) DR. Bonds Payable 1,000,000 (maturity) CR. Cash 1,000,000 Bonds @ Discount (mkt rate 11% >bond rate 10%) DR Cash 941,108 (issuance) DR Bond Discount 58,892 CR Bonds Payable (par) 1,000,000 DR Interest Expense 103,522 (11%*941,108) CR Accrued Interest Payable 100,000 CR Bond Discount 3,522 -Bond net carrying amount increases to par and interest expense increases -proceeds<principle amt -int expense>cpn paid Bond @ Premium (mkt rate 9%<bond rate10%) DR Cash 1,064,177 CR Bond Premium 64,177 CR Bonds Payable (Par) 1,000,000 DR Interest Expense 95,776 DR Bond Premium 4,224 CR Accrued Interest payable 100,000 -Interest expense decrease over life of bond -proceeds exceed principle -int exp<cpn paid Interest payable= bond FV*cpn rate Interest expense=NBV of bond*mkt rate Premium/discount=interest exp-interest payment NO GAIN OR LOSS ON DEBT RETIRED AT MATURITY Early retirement DR Bonds payable book value (par) CR Cash Market Value CR Gain on debt extinguishment (difference)


BS(total) CFF


Amortization of LTD discount = CFO NBV LTD retired at maturity 2009=CPLTD 2008 (BS) Total cash paid to retire debt (CFF)=cash paid to retire debt at maturity (CPLTD-BS)+cash paid to retire debt prior to maturity (PLUG) Total Book Value of Liabilities under capital leases (current + LT) = BS (may be split as LT and current/notes) NBV of Capital Lease Assets = Gross capital leases (BS) accumulated depreciation under capital leases (notes) Interest rate on cap leases = (next yrs payment-current maturity of lease liab)/present value of liab (Notes) Assume that all of operating leases were treated as capital leases, how much would debt increase? Take each years operating lease & find PV (/(1+r)t)

Capital Lease (Lesee Accounting) Case 1 Operating lease (record over life of lease) Rent expense 16,462 Cash 16,462 Case 2 Capital lease Inception Leased Asset 50,000 Lease Obligation 50,000 - Record asset and liability at present value of lease payments Each year from 2008 - 2011 Depreciation expense 12,500 Accumulated Depreciation 12,500 - Record depreciation (50,000/4 years) over lease term Each annual payment is allocated between interest and principal: Interest expense each period is calculated as interest rate * the outstanding lease obligation. The remainder of the annual payment is accounted for as a reduction to the lease obligation Interest expense (50,000 * 12%) 6,000 Lease Obligation 10,462 Cash 16,462

Ending NBV (notes)-BB NBV(CFF) = amortized of discount/prem NBV retired in 2009=prior to maturity (plug) + at maturity (CPLTD in 2008 on BS or notes)

Capital Lease Assets (current &LT)Historical Cost BB (BS/Notes) New leases ( CF/notes) Retirement (PLUG) EB (BS/notes)

Capital Lease Liabilities (NBV) Retirements (PLUG) BB (notes) New Leases (Notes) EB (Notes)


3. Permanent differences never affect deferred taxes or Trading Securities total tax expense. Permanent differences do change the Changes in market value are reported on the income effective rate by affecting EBT. statement as unrealized gain or loss Normally part of other income or investment Difference between tax and financial NBV of PPE income (notes) = Financial NBV (BS) - NBV for tax purposes Only gains (losses) that occur since last reporting (plug) date are recognized on the income statement. Ex. Record additional permanent impairment Changes in market value bypass income statement NI and are reported on the balance sheet as Deferred Income Taxes 0 Income taxes payable 0 Accumulated Other Comprehensive Income (AOCI) Net CFO 0 Realized gains are measured relative to original Effective Tax Rate + cost so, when sell, transfer unrealized gains (losses) Ex. Record 100 additional D&A for tax reporting out of AOCI and into realized gains. The holding NI 0 gains (losses) are included in earnings (income Deferred Income Taxes 100*.35 statement) when realized. Income taxes payable -100*.35 The balance in the Allowance account represents Net CFO 0 the cumulative unrealized holding gain (debit Effective Tax Rate 0 balance) or loss (credit balance) incurred on these investments since they were acquired not just this period. 1. Cash outflows for purchases of debt held to maturity and AFS are recorded as Investing Activities. c(3) Tax Example ABC Corporation has one asset with a 2. Cash outflows related to trading securities are book value of $10,000. This asset generates revenue recorded as Operating Activities. (cash flows) of $5,000 per year. Depreciation expense 3. Interest/Dividend income is included in Net Income. on this asset is: Financial = $2,000; Tax = $3,800. The 4. Mark to Market Adjustment: statutory tax rate is 34%. What is income tax expense? Trading Securities: reversed out What is the amount payable to the IRS? What happens from Cash from Operations. to the difference? Available for Sale: N/A. IS Approach 5. Sale of Securities Debt Held to Maturity: Cash proceeds recorded as Investing Activity inflow. Trading Securities: Cash proceeds recorded as Operating Activity inflow. Available for Sale Securities: Cash proceeds recorded as Investing Activity inflow. Gain/Loss reversed out (adjustment) in Cash from Operations Tax expense is matched to income in the period by Basic EPS = Net Income Preferred Dividends Available for Sale Allowance Adjust to Market basing it on financial statement income BB BB Weighted Average Common Shares Outstanding adjusted for any permanent differences (APTI). Deferred Purchases this HC securities Cum. H.G. Common shares outstanding=#issued (BS)tax accounts on the balance sheet make up for the year sold this year securities sold this year #treasury stock(BS) difference between the accrual based tax expense and APIC=Common Stock (BS)-shares issued*par value the taxes actually paid. (BS) OTHER Unreal. Gains Unreal. Losses this year this year Dividends declared (SSE) OTHER Dividends Paid (CFF) EB EB #common shares repurchased in a Example (HTM): On Jan. 1, 2009 Company P purchased specific year (SSE) a $100 face value, 10% semi-annual coupon #common shares repurchased as of bond maturing at Dec. 31, 2014. The bond was yielding current yr (BS) 12%, compounded semi-annually, and [Income]Tax Expense (IS/Notes) (to find Cash paid, look Amount paid to repurchase common shares (CCF/SSE) hence P paid $92.64 for it. at Notes/CF) Stock-based compensation (CFO/notes/non-cash HTM 92.64 Deferred Tax Liability/Asset (CFO/Notes) expense) Cash 92.64 [Income] Tax Payable (Notes) Total fair value of stock options granted=weighted HTM .56 The origination (i.e. , recognition of a credit to) of a average fair value/option (Notes) x options granted Int. Rec 5 (FV x x .10) Net Deferred Tax Liability cause income tax expense (notes) Int. Rev. 5.56 (NBV x x .12) to be greater or less than the amount currently During Vesting period Example Trading: On January 1, 2009, Company P payable DR Compensation Expense(CFO/SSE) XXX purchased 15% of Company Ss outstanding Effective tax rate = [Income Tax Expense (IS)/EBT (IS)] CR APIC XXX common stock for $10,000. During 2009, Company Ss 1. Income tax expense = Current tax expense + deferred At Exercise net income was $12,000 and it declared tax expense DR Cash (CFF) XXX and paid $5,000 in dividends to all shareholders. At 2. Deferred tax expense results from TEMPORARY OR CR APIC XXX December 31, 2009, the fair market value of TIMING differences.

Ps investment in S was $12,000. On February 1, 2010, P sold its investment in S for $13,000. Assume a tax rate of 40%. 1/1/9 Trading 10,000 Cash 10,000 During the year Cash 750 Dividend Revenue 750 12/31/9 To adjust to market (IS) Allowance Trading 2000 Unrealized holding gain 2000 Tax expense 1100 = (2000+750) x.4 Tax payable 300 = 750 x .4 DTL 800 = 2000 x .4 2/1/10 To record sale Cash 13,000 Trading 10,000 Allowance - Trading 2000 Realized Gain 1000 Tax expense 400 DTL 800 Tax payable 1200 (= 13000-10000) x .4 AFS 1/1/9 AFS 10,000 Cash 10,000 During the year Cash 750 Dividend Revenue 750 12/31/9 To adjust to market value Allowance - AFS 2000 Accum Other Comprehensive Income 1200 Deferred Tax Liability 800 2/1/10 To record sale Cash 13,000 AFS 10,000 Realized Gain 3000 AOCI 1200 Def Tax Liab 800 Allowance AFS 2000 Tax expense 1200 (13,000 10,000) x .4 Tax payable 1200