***FSA SS-10 Review ***

Assuming all other factors are constant, a sales-type lease will result in higher: A) interest revenue as compared to a direct financing lease. B) cash flow from operations (CFO) as compared to a direct financing lease. C) cash flow from investing (CFI) as compared to a direct financing lease. D) total cash flows.

A manufacturing firm has just signed an 8-year lease on a new machine as the lessor. Fair market value of the machine is \$100,000. Lease payments are \$18,000 per year, payable at the end of the year. The machine has no salvage value at the end of the lease term. The firm’s incremental borrowing rate is 9.6%. What is the implicit interest rate in this lease? A) 9.6%. B) 12.4%. C) 12.8%. D) 8.9%. At the inception of the lease, the value the firm should report on its balance sheet is closest to: A) \$97,440. B) \$98,500. C) \$100,000. D) \$106,140. -------------------------------------------------------------------------------- When the first lease payment is made, what will be the amount of interest exposure? A) \$0. B) \$8,900. C) \$12,842. D) \$9,887.

2nd Question: ============================ Part I PV = -100000, N=8, PMT=18000, I/Y=?, FV=0 (No salvage) Comes to 8.9% — Choice D With the above – Part II becomes 100000 ==> Amount of capital assets == Choice C Part III End of Year I --> Interest expense = 100000 * .089 = 8900 Choice B maratikus, are these correct? I have not done this chapter since the last time some time in May/June time frame, but am taking a stab at it… CP

maratikus Wrote: ------------------------------------------------------- > Assuming all other factors are constant, a > sales-type lease will result in higher: > > A) interest revenue as compared to a direct > financing lease. > > > B) cash flow from operations (CFO) as compared to > a direct financing lease. > > > C) cash flow from investing (CFI) as compared to a > direct financing lease. > > > D) total cash flows. —answer is C, higher CFI, because net investment will be higher, so to amortize a bigger investment, CFI is higher

cpk123 Wrote: ------------------------------------------------------- > 2nd Question: > ============================ > Part I > PV = -100000, N=8, PMT=18000, I/Y=?, FV=0 (No > salvage) > > Comes to 8.9% — Choice D > > With the above – Part II becomes 100000 ==> > Amount of capital assets == Choice C > > Part III > End of Year I --> Interest expense = 100000 * .089 > = 8900 > Choice B > > maratikus, are these correct? > > I have not done this chapter since the last time > some time in May/June time frame, but am taking a > stab at it… > > CP —I got all the same answers, D, C, B in that order

btw, what happened to SS-9 review? are we skipping it?

Good job, guys! I will post more questions later.

Which of the following statements about the sale of receivables is FALSE? A) Sales of receivables may be recorded as sales under U.S. GAAP. B) The seller is allowed to use the proceeds to reduce debt. C) After the sale, the buyer receives the payments directly from the customer. D) Accounts receivable reported on the balance sheet are reduced after the sale.

‘C’ I think the payments still need to be routed throught via the seller to the ultimate buyer… - Dinesh S

you are correct, dinesh!

here’s another one. No answers given, work it out: ---------- ABC firm’s marginal tax rate went from 50% to 40%. DTA \$1000 DTL \$5000 What is the decrease or increase in income tax expense?

DTA and DTL are going to decrease to 800 and 4,000. Therefore, interest tax expense is going to be lower by \$900 due to the change in DTL and DTA.

maratikus… Could you explain how you came up with that? Thanks

DTA @ 50% tax rate = 1000 therefore DTA with the 40% tax rate = 1000 * .4/.5 = 800 DTL @ 50% = 5000 at 40% = 5000 * .4/.5 = 4000\$ Tax Expense = Tax payable + delta DTL - delta DTA = Tax Payable + 4000 originally Now wil lbe Tax payable + 3200 Therefore new tax will be 800\$ lower.

yeah I guess that makes sense…haha… thanks

nice work, cpk123.

maratikus Wrote: ------------------------------------------------------- > Assuming all other factors are constant, a > sales-type lease will result in higher: > > A) interest revenue as compared to a direct > financing lease. > > > B) cash flow from operations (CFO) as compared to > a direct financing lease. > > > C) cash flow from investing (CFI) as compared to a > direct financing lease. > > > D) total cash flows. I think the answer should be B. CFO is higher for the sale types lease. There is an example in Schweser book. It seems to confirm this. It is a bit strange the CFO is recognized here. The profit is recognized as CFO and and an equal amout CFI outflow is recognized at year 0. The rest is just interest. Are most of you going for C instead? Can you explain it a bit more?

chadtap Wrote: ------------------------------------------------------- > maratikus… > > Could you explain how you came up with that? > > Thanks Messed up subtracting 1,000 and 200 the answer should’ve been \$800 indeed.