## FA Mod 11 Finance lease practice exam questions

 Author Message NEAS Supreme Being         Group: Administrators Posts: 4.2K, Visits: 1.2K FA Module 11 Finance lease practice exam questions(The attached PDF file has better formatting.)A firm enters into a four year finance lease on 1/1/20X1. ●    Lease payments of 176 are due on January 1 of 20X1, 20X2, 20X3, and 20X4. ●    The fair value of the equipment = the present value of the lease payments at the firm’s 4% discount rate. ●    The useful life of the equipment is four years and the salvage value is zero; use straight line depreciation. The firm has earnings before tax and operating cash flow (not including expenses related to the lease) of 277 each year. The tax rate is 20%.On January 1, 20X1, the firm’s common stock is 534 and its long-term debt is 370.Use the assumptions in the textbook about how the lease payments are divided between interest expense and reduction of the lease liability.Question 11.1: Fair value of leased assetWhat is the fair value of the equipment on January 1, 20X1?Answer 11.1: 176 × (1 + 1.04–1 + 1.04–2 + 1.04–3) = 664.42(fair value = present value of future cash flows) Question 11.2: Interest expenseWhat is the interest accrued (= interest expense) in 20X1?Answer 11.2: 4% × (664.42 – 176) = 19.54(interest expense = (fair value – lease payment) × discount rate)Question 11.3: Lease liabilityWhat is the lease liability on December 31, 20X1?Answer 11.3: 664.42 – 176 + 19.54 = 507.96(lease liability at the end of the year = lease liability at the beginning of the year – lease payment + interest expense)Question 11.4: Interest expenseWhat is the interest accrued (= interest expense) in 20X2?Answer 11.4: 4% × (507.96 – 176) = 13.28(interest expense = (fair value – lease payment) × discount rate)Question 11.5: Lease liabilityWhat is the lease liability on December 31, 20X2?Answer 11.5: 507.96 – 176 + 13.28 = 345.24(lease liability at the end of the year = lease liability at the beginning of the year – lease payment + interest expense)Question 11.6: Depreciation expenseWhat is depreciation expense in 20X1?Answer 11.6: 664.42 / 4 = 166.105(depreciation expense = fair value / estimated useful life)Question 11.7: Pre-tax incomeWhat is pre-tax income in 20X1?Answer 11.7: 277 – 19.54 – 166.105 = 91.355(pre-tax income = earnings before tax excluding the lease – interest expense – depreciation expense)Question 11.8: Net incomeWhat is net income in 20X1?Answer 11.8: 91.355 × (1 – 20%) = 73.08(net income = pre-tax income × (1 – tax rate) )Question 11.9: Pre-tax incomeWhat is pre-tax income in 20X2?Answer 11.9: 277 – 13.28 – 166.105 = 97.615(pre-tax income = earnings before tax excluding the lease – interest expense – depreciation expense)Question 11.10: Net incomeWhat is net income in 20X2?Answer 11.10: 97.615 × (1 – 20%) = 78.09(net income = pre-tax income × (1 – tax rate) )Question 11.11: Operating cash flow What is the operating cash flow in 20X1 for GAAP?Answer 11.11: 277 – 20% × 91.355 = 258.73(operating cash flow = operating cash flow excluding the lease – tax paid; for simplicity, this practice exam question has operating cash flow excluding the lease = pre-tax income excluding the lease)Question 11.12: Financing cash flow What is the financing cash flow in 20X1 for GAAP?Answer 11.12: -176(financing cash flow = negative of lease payment)Question 11.13: Operating cash flow What is the operating cash flow in 20X2 for GAAP?Answer 11.13: 277 – 20% × 97.615 – 19.54 = 237.94(operating cash flow = non-lease operating cash flow – taxes paid – interest paid)Question 11.14: Financing cash flow What is the financing cash flow in 20X2 for GAAP?Answer 11.14: (507.96 – 345.24) / 1.04 = 156.46(Reduction in lease liability is at the end of the year; financing cash flow is part of the lease payment and occurs at the beginning of the year; divide by the discount rate)Question 11.15: Return on equityWhat is the return on equity in 20X1?Answer 11.15: 73.08 / ( (534 + 534 + 73.08) / 2) = 12.81%(return on equity = net income / (average shareholders’ equity)Question 11.16: Return on equityWhat is the return on equity in 20X2?Answer 11.16: 78.09 / ( (534 + 73.08 + 534 + 73.08 + 78.09) / 2) = 12.09%(return on equity = net income / (average shareholders’ equity)Question 11.17: Debt-to-equity ratioWhat is the debt-to-equity ratio on December 31, 20X1?Answer 11.17: (370 + 507.96 + 19.54) / (534 + 73.08) = 147.84%(debt-to-equity ratio = long-term debt + lease liability + accrued interest) / shareholders’ equityQuestion 11.18: Debt-to-equity ratioWhat is the debt-to-equity ratio on December 31, 20X1?Answer 11.18: (370 + 345.24 + 13.28) / (534 + 73.08 + 78.09) = 106.33%(debt-to-equity ratio = long-term debt + lease liability + accrued interest) / shareholders’ equity Attachments FA Module 11 Finance lease practice exam questions.pdf (154 views, 40.00 KB) Edited 2 Years Ago by NEAS mitchs m Forum Newbie         Group: Forum Members Posts: 2, Visits: 3 Where do the values for initial shareholder equity and long-term debt come from in this example? NEAS Supreme Being         Group: Administrators Posts: 4.2K, Visits: 1.2K +x mitchs - 12/5/2018 6:14:00 PMWhere do the values for initial shareholder equity and long-term debt come from in this example?NEAS: They are assumptions that are given in the exam problem (similar to the problem in the textbook). mitchs m Forum Newbie         Group: Forum Members Posts: 2, Visits: 3 +x NEAS - 12/5/2018 6:28:53 PM+x mitchs - 12/5/2018 6:14:00 PMWhere do the values for initial shareholder equity and long-term debt come from in this example?NEAS: They are assumptions that are given in the exam problem (similar to the problem in the textbook).I do not see assumptions for Shareholder Equity or Long-Term Debt in the problem description. NEAS Supreme Being         Group: Administrators Posts: 4.2K, Visits: 1.2K +x mitchs - 12/5/2018 6:48:30 PM+x NEAS - 12/5/2018 6:28:53 PM+x mitchs - 12/5/2018 6:14:00 PMWhere do the values for initial shareholder equity and long-term debt come from in this example?NEAS: They are assumptions that are given in the exam problem (similar to the problem in the textbook).I do not see assumptions for Shareholder Equity or Long-Term Debt in the problem description.NEAS: Thank you for noticing the omission; we have added the information to the file on the discussion forum.
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