Can someone please help me with this? 1. RGH entered into a sale-leaseback arrangement of its manufactoring plant. when should RGH recognize the gain on the sale of the plant under IAS GAAP? A. Recognize the gain immediately if the lease is an operating lease and defer the gain if the lease is a capital lease. B. Defer the gain if the lease is an operating lease and recognize the gain immediately if the lease is a capital lease C. Defer the gain if the lease is a capital lease or an operating lease D. Recognize the gain immediately if the lease is a capital lease or an operating lease. Why isn’t the answer D? First of all, isn’t a sale type lease by definition capital lease? And at inception, a gain is recognized on the balance sheet equal to the PV of the min lease payment less the cost of the leased asset… I don’t get it. Answer’s A 2. Shelby Enterprise recently entered into a new $500m revolving credit facility. The provisions of the facility require Shelby to repay the facility before any other debt can be retired. In addition, if the company’s debt to capital ration is higher than 1.0 and their net worth falls below $2billion, Shelby will be prohibited from paying any dividends. Indicate why Shelby would agree to the above mentioned covenants A. Lower risk to existing bond and shareholders B. Lower the company’s interest cost Why is the answer not A? Thanks
- Shelby Enterprise recently entered into a new $500m revolving credit facility. The provisions of the facility require Shelby to repay the facility before any other debt can be retired. In addition, if the company’s debt to capital ration is higher than 1.0 and their net worth falls below $2billion, Shelby will be prohibited from paying any dividends. Indicate why Shelby would agree to the above mentioned covenants A. Lower risk to existing bond and shareholders B. Lower the company’s interest cost Why is the answer not A? They don’t have an incentive to lower risk to existing bondholders/shareholders. The company is motivated to raise capital at the lowest cost.
First question: a lease is a capital lease if at least one of the 4 conditions occur (75% of the estimated economic life of the asset, PV of all future minimum rent payments is at least 90% of its market value, a bargain purchase provision , or transfer of title at the end of the lease). A sale leaseback arrangement works like this: company sells the asset and leases it back from the buyer: the company has a manufacturing plant and it sells it to a buyer, but it leases it back from the buyer and continues to produce in that manufacturing facility. I have seen written that, if the asset is highly specialized to fit the needs of the lessee, under IAS17 (I believe) the lease should be considered as a capital lease. Now, if the lease is a capital lease, it meets at least one of the 4 provisions; you assume the risk of owning the asset, and you share your benefits with the your lessor. You sold the asset, but you still run the risks associated with ownership. There is no gain for you to recognize at the time of sale. If the lease is an operating lease, you have no risks associated with the asset leased; all risks have been passed to the buyer, your lessor now. Since you no longer have risks, recognize gains or losses on the sale. For the second question, the debt covenants are restrictions on future borrowings and regard future activities of the company. The debt covenants are designed to protect the issuer of that specific debt and have nothing to do with existing shareholders or bonds. Debt covenants are restrictions on the company taking more risk than it already has, being understood that higher leverage increases risk, therefore increases the cost of investment.
frangoya Wrote: ------------------------------------------------------- > Can someone please help me with this? > > 1. RGH entered into a sale-leaseback arrangement > of its manufactoring plant. when should RGH > recognize the gain on the sale of the plant under > IAS GAAP? > > A. Recognize the gain immediately if the lease is > an operating lease and defer the gain if the lease > is a capital lease. > B. Defer the gain if the lease is an operating > lease and recognize the gain immediately if the > lease is a capital lease > C. Defer the gain if the lease is a capital lease > or an operating lease > D. Recognize the gain immediately if the lease is > a capital lease or an operating lease. > > Why isn’t the answer D? First of all, isn’t a sale > type lease by definition capital lease? And at > inception, a gain is recognized on the balance > sheet equal to the PV of the min lease payment > less the cost of the leased asset… I don’t get > it. Answer’s A > > 2. Shelby Enterprise recently entered into a new > $500m revolving credit facility. The provisions of > the facility require Shelby to repay the facility > before any other debt can be retired. In addition, > if the company’s debt to capital ration is higher > than 1.0 and their net worth falls below > $2billion, Shelby will be prohibited from paying > any dividends. Indicate why Shelby would agree to > the above mentioned covenants > A. Lower risk to existing bond and shareholders > B. Lower the company’s interest cost > > Why is the answer not A? > > Thanks In regards to the first question: To purpose of sales leaseback agreements is to free up cash. A company will sell its manufacturing plant to someone, and they will then proceed to lease it from the buyer over a specified term. If this term qualifies as a capital lease for the lessee (You do your common test), then they have to defer the gain on the building and recognize it over the lease term. If the lease is classified an operating lease, then they may recognize the gain immediately.
Hey is book 7 all its cracked up to be because im looking to find harder challenging questions?
They are not harder, it’s just a game of words, if you ask me it’s stupid as hell as it’s not representative of CFAi’s exams or what we actually will get. It’s overdone, but i suppose if you can do those exams in 3 hours and still score over 70 without cheating, you are pretty much guaranteed a pass. They do have some better questions that require greater application.
ok i’ll think i’ll try it cause the wording does affect my scores
Map1 De Don