FAR Drill

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Bonds (effective-interest method)

• Issue price = face × PV of $1 + cash interest × PV of annuity, both at the market rate per period.
• Cash interest = face × stated rate per period. Interest expense = carrying value × market rate per period.
• Market > stated → discount. Market < stated → premium. The difference each period is amortization, moving carrying value toward face.

Leases (lessee, ASC 842)

• Finance lease if any test is met (OWNES): Ownership transfers, Written purchase option reasonably certain, Ninety percent (PV ≥ substantially all of fair value), Economic life (term is a major part, ≈75%), Specialized asset.
• Lease liability = PV of payments at the implicit rate, or the incremental borrowing rate if that isn't known.
• Finance: interest expense (liability × rate) + straight-line ROU amortization. Operating: one straight-line lease cost.

Revenue (ASC 606)

• 1 Identify the contract · 2 Identify performance obligations · 3 Determine the transaction price · 4 Allocate it · 5 Recognize revenue as each obligation is satisfied.
• Allocate by relative standalone selling price. Over-time (cost-to-cost): revenue to date = price × costs to date ÷ estimated total costs.
• Variable consideration: expected value or most likely amount, subject to the constraint.

Income taxes (ASC 740)

• Total tax expense = current (taxable income × rate) + deferred (change in DTL − change in DTA).
• Future taxable amounts → DTL. Future deductible amounts → DTA. Permanent differences → no deferred tax.
• Measure deferred taxes at the enacted rate for the reversal years. Valuation allowance if more likely than not a DTA won't be realized.

Current liabilities & contingencies

• Accrued interest = principal × rate × months ÷ 12. If a total includes sales tax: revenue = total ÷ (1 + rate).
• Loss contingency: probable + estimable → accrue (best estimate; if none, the low end of the range). Reasonably possible → disclose only. Remote → nothing. Gain contingencies are never accrued.

More on bonds & leases

• Early retirement: gain or loss = carrying value − price paid. Conversion (book value method): no gain or loss.
• Sold between interest dates: buyer pays accrued interest since the last interest date.
• ROU asset = lease liability + initial direct costs + prepaid payments − incentives. Payments at the start of each period → annuity due.

Stockholders' equity

• Stock accounts hold par; the rest goes to APIC. No gains or losses on treasury stock: excess to APIC—Treasury Stock; shortfalls use that APIC first, then retained earnings.
• Small stock dividend (< 20–25%): market value. Large: par. Splits: memo entry only. Property dividends: remeasure to fair value first.
• Cumulative preferred gets arrears plus the current year before common.

EPS

• Basic = (net income − current-year preferred dividends) ÷ weighted-average shares. Cumulative preferred: subtract always; noncumulative: only if declared.
• Splits and stock dividends are retroactive, not weighted.
• Options (treasury stock method): incremental shares = options − options × exercise price ÷ average market price.
• Convertible bonds (if-converted): add after-tax interest and the conversion shares. Leave out anything antidilutive.

Cash flows (US GAAP)

• Operating: items in net income, including interest paid, interest received and dividends received. Investing: long-term assets, non-trading investments, loans made. Financing: borrowing and repaying principal, stock, dividends paid, finance lease principal.
• Indirect: net income + noncash expenses and losses − gains; current assets ↑ subtract, current liabilities ↑ add.
• Direct: customers = sales − ↑AR + ↑unearned revenue. Suppliers = COGS + ↑inventory − ↑AP.
• Noncash investing and financing (debt converted to stock, assets bought with notes) is disclosed separately.

More on revenue

• Residual approach only for highly variable or uncertain standalone prices. Expected returns → refund liability, not revenue.
• Principal (controls the good) → gross. Agent → net. A loss contract → recognize the whole loss now.

Round dollar answers to the nearest dollar and EPS to the nearest cent.