FAR CPA

How much interest do you capitalize on a self-constructed asset?

The lesser of avoidable interest (weighted-average accumulated expenditures × rate) and actual interest incurred. Stop capitalizing once the asset is ready for use.

What goes into the lease liability for a guaranteed residual value?

The lessee includes the PV of the amount it expects to owe (guarantee − expected residual value, only if positive). The lessor includes the PV of the full guaranteed amount.

How do you handle a change in principle, a change in estimate, and an error correction?

A change in principle is applied retrospectively. A change in estimate is applied prospectively. An error correction restates prior periods, and switching from a non-GAAP to a GAAP method counts as an error.

Who are market participants, and are transaction costs part of fair value?

Market participants are independent, knowledgeable, and able and willing to transact. Transaction costs are not part of fair value. The transaction price may not equal fair value in a related-party deal, a forced sale, or a different market.

What changes the investment account under the equity method?

Your share of the investee’s income increases it, dividends decrease it, and amortization of excess cost on specific assets decreases it. Goodwill isn’t amortized.

What creates a DTL vs. a DTA, and at what rate?

Only temporary differences create deferred taxes. Future taxable amounts create a DTL, and future deductible amounts create a DTA, both at the enacted future rate. Permanent differences never create deferred taxes.

What are the entries for estimating credit losses, writing off an account, and a recovery, and which ones affect net AR or net income?

• Estimate: Dr Credit loss expense, Cr Allowance. Net income goes down. This is the only one of the three that affects it.

• Write-off: Dr Allowance, Cr AR. No effect on net AR or net income.

• Recovery: Dr AR, Cr Allowance, then Dr Cash, Cr AR. No effect on net AR or net income.

You discount a note receivable with recourse. What do you report until the customer pays?

A contingent liability, disclosed for the note’s maturity value (face plus interest)

How do you record a property dividend?

Revalue the property to fair value and recognize a gain or loss in income. Then debit Retained earnings and credit Property dividend payable at fair value. The net effect on retained earnings equals the property’s carrying amount.

What value do you use to record a small stock dividend vs. a large one?

• Small (under 20–25%): fair value. Dr Retained earnings, Cr Common stock (par) and APIC (the rest).

• Large (over 20–25%): par value only. Dr Retained earnings, Cr Common stock dividend distributable. No APIC.

How is treasury stock recorded under each method?

• Cost method: debit Treasury stock at cost. A reissue above cost credits APIC–treasury stock. A reissue below cost debits APIC–treasury stock first, then retained earnings.

• Par method: debit Treasury stock at par and remove the original APIC from that issuance. Any excess paid comes out of APIC–treasury stock or retained earnings.