FSA L1- long term liabilities

deepakkrkanodia
Finance Junkie
Posts: 49
Joined: Thu Aug 09, 2012 4:45 pm

FSA L1- long term liabilities

Postby deepakkrkanodia » Fri Feb 08, 2013 10:22 am

Q1. A firm issues a $10 million bond with a 6% coupon rate, 4 year maturity, and annual interest payments when market interest rates are 7%.

If the market rate changes to 8% and the bonds are carried at amortized cost, the book value of the bonds at the end of the first year will be:
A. $9,484,581.
B. $9,661,279.
C. $9,737,568.

Query: why the answer is C and not A, please see below as I have calculated this on both 7% and 8% but schweser had taken ending bond liability value of 7% and not of 8%, please tell the reason

Calculation on 7%
pmt =600000
n=4
i/y =7% coupon rate-=6%
fv=10000000

pv $9,661,278.87
beginning liability interest exp coupon discount ending liability
1 $9661278.87, $676289.52, $600000, $76290, $9737,568.40
2 $9737568.40, $681629.79, $600000, $81630, $9819198.18
3 $9819198.18, $687343.87, $600000, $87344, $9906542.06
4 $9906542.06, $693457.94, $600000, $93458, $10000000.00

Calculation on 8%
pmt=600000
n=4
i/y = 8% coupon rate=6%
fv=10000000

pv $9,337,574.63
beginning liability interest exp coupon discount ending bond liability
1 $9337574.63, $747005.97, $600000, $147006, $9484580.60
2 $9484580.60, $758766.45, $600000, $158766, $9643347.05
3 $9643347.05, $771467.76, $600000, $171468, $9814814.81
4 $9814814.81, $785185.19, $600000, $185185, $10000000.00


Q2. At the beginning of 20X6, Cougar corporation enters a finance lease requiring five annual payments of $10,000 each beginning on the first day of the lease. Assuming the lease interest rate is 8%, the amount of interest expense recognized by Cougar in 20X6 is closest to:
A. $2,650.
B. $3,194.
C. $3,450.

Query : I have calculated Present value of lease payments as $43121. And now I am calculating 8% interest expense on $43121, according to me answer is coming as $3450,
but the correct answer is $2650 (($43121-10000)*8%). Why the interest is calculated on beginning lease value less principal payments, actually it should be calculated on beginning lease value only and then ending value of lease will be calculated as beginning book value + interest expense – annual payments

Q3. In finance as well as operating lease, at the end of the lease, who is entitled for or who gets the asset actually at the end in both cases.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

FSA L1- long term liabilities

Postby content.pristine » Sat Feb 09, 2013 11:45 am

1. Ok, so we found that we bought the bond today at $9,661,279.
Lets say its a year later, the market value of the security would be based on 8% discount rate.
But since it is valued by amortised value - just from the concept of PULL TO PAR, you can safely say that the answer needs to be higher than $9,661,279. Hence, C is your answer. Definitely not A! :-)
2. Well the first step, calculating the PV is absolutely on the dot. The thing you forgot to take into account is that the cashflows dont start on year 1, they start at year 0. Hence, it is already paid and we dont need to pay interest on that part.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Postby content.pristine » Sat Feb 09, 2013 12:15 pm

3. In a capital/finance lease you MAY chose to purchase the asset at the end. That is one of the identifying criteria in both IFRS and US GAAP. Again this is not a must.
In case of Operating, it belongs to the lessor.

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Postby content.pristine » Sat Feb 09, 2013 1:25 pm

1. Under normal circumstances, The employee cannot take a database of clients of the company. That is property of the company. Under this code, if you have their phone numbers stored in your phone, they should be deleted.

However, if your company allows you to take this client data after signing a non-compete agreement - that means you CAN take the data, BUT you cannot use this data to compete with the firm. I'm giving you an exaggerated example so you can understand:

Say you work for a broking firm. You have a list of clients. Now, if you leave the job to join a beauty salon for HNI's you can take the client list with a non-compete agreement, because you are not using this information (client data) against the broking firm. However, if you decided to join another broking firm and sign the non-compete clause and use this client data against the original firm, that is a violation of the standard.



2. All funds, including the funds having institutional funds (IF) as investors have several fund management fees attached. Now, if there was some sort of deal with the (IF) that a certain percent would be paid to certain people in the (IF) that is a conflict of interest. The fund managers at the (IFs) need to watch portfolio returns and quality of investments. Not these benefits and perks.



3. The conflict of interest here is that they should not participate in the secondary market. Here, the firm should not show by trades that the security is very liquid. They should not increase volumes as that is a misrepresentation of the volumes of trades of that security. The market should decide that! This activity is against the integrity of the financial markets.



4. Basically the logic here was, if the place needed to visit is remote and difficult to reach, that won’t be against the standards. However, it the place is easily accessible, the company the person belongs to should pay. That would be against the standards.



5. Cupp clearly changed the dates. So the awesome performance of the fund was not due to ABC’s performance. It was due to that that particular client. This tremendously misrepresents the performance of ABC.


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