FAR Formula, Ratio, and Journal Entry Reference for Final Review

Use this page as a late-stage FAR reference. The formulas and entries below are intentionally compressed, but the exam rarely rewards memorization alone. For each item, know the triggering fact pattern, the account affected, and the financial statement effect.

How to Use This Reference

FAR questions often combine a formula with a journal-entry consequence. A bond problem may require effective interest first, then the carrying amount. A receivables problem may require an allowance estimate first, then the correct write-off entry. A lease or revenue problem may ask for a balance sheet amount after several recognition events.

    flowchart LR
	    A["Read the fact pattern"] --> B{"Is the task a measurement question?"}
	    B -->|Yes| C["Identify the formula and period"]
	    B -->|No| D["Identify recognition, derecognition, or presentation"]
	    C --> E["Calculate the amount"]
	    D --> F["Choose the debit and credit effect"]
	    E --> G["Tie the result to the statement line item"]
	    F --> G

Before calculating, mark the date, reporting period, method, and account basis. Most FAR mistakes come from using the right formula on the wrong base.

Core Formulas

Formula Traps

Journal Entry Patterns

The exact account names in a simulation may vary, but the debit and credit logic should remain stable. Read each entry as an account-effect pattern rather than a script to memorize.

Receivables and Allowance Accounting

Estimate expected credit losses under the allowance method:

1Debit   Bad Debt Expense
2Credit  Allowance for Doubtful Accounts

Write off a specific account after it is deemed uncollectible:

1Debit   Allowance for Doubtful Accounts
2Credit  Accounts Receivable

Collect a receivable:

1Debit   Cash
2Credit  Accounts Receivable

Inventory and Cost of Goods Sold

Purchase inventory under a perpetual system:

1Debit   Inventory
2Credit  Cash or Accounts Payable

Record a sale under a perpetual system:

1Debit   Cash or Accounts Receivable
2Credit  Sales Revenue
3
4Debit   Cost of Goods Sold
5Credit  Inventory

The first pair records the customer transaction. The second pair removes the cost of the item sold.

Property, Plant, Equipment, and Depreciation

Acquire an asset:

1Debit   Property, Plant, and Equipment
2Credit  Cash, Accounts Payable, or Notes Payable

Record depreciation:

1Debit   Depreciation Expense
2Credit  Accumulated Depreciation

Dispose of equipment for proceeds above carrying amount:

1Debit   Cash
2Debit   Accumulated Depreciation
3Credit  Equipment
4Credit  Gain on Disposal

If proceeds are below carrying amount, debit a loss instead of crediting a gain.

Debt Issuance and Effective Interest

Issue bonds at a discount:

1Debit   Cash
2Debit   Discount on Bonds Payable
3Credit  Bonds Payable

Amortize a discount under the effective interest method:

1Debit   Interest Expense
2Credit  Discount on Bonds Payable
3Credit  Cash

Issue bonds at a premium:

1Debit   Cash
2Credit  Premium on Bonds Payable
3Credit  Bonds Payable

Amortize a premium under the effective interest method:

1Debit   Interest Expense
2Debit   Premium on Bonds Payable
3Credit  Cash

Revenue, Accruals, and Unearned Amounts

Recognize revenue when the performance obligation is satisfied:

1Debit   Cash or Accounts Receivable
2Credit  Revenue

Collect cash before satisfying the performance obligation:

1Debit   Cash
2Credit  Contract Liability or Unearned Revenue

Recognize revenue previously deferred:

1Debit   Contract Liability or Unearned Revenue
2Credit  Revenue

Accrue an expense incurred but not yet paid:

1Debit   Expense
2Credit  Accrued Liability

Pay an accrued liability:

1Debit   Accrued Liability
2Credit  Cash

Equity and Treasury Stock

Issue common stock for more than par:

1Debit   Cash
2Credit  Common Stock
3Credit  Additional Paid-in Capital

Repurchase shares using the cost method:

1Debit   Treasury Stock
2Credit  Cash

Reissue treasury stock above cost:

1Debit   Cash
2Credit  Treasury Stock
3Credit  Additional Paid-in Capital from Treasury Stock

Leases and Contingencies

Recognize a lease at commencement when the lessee records a right-of-use asset and lease liability:

1Debit   Right-of-Use Asset
2Credit  Lease Liability

Record a finance lease payment:

1Debit   Interest Expense
2Debit   Lease Liability
3Credit  Cash

Record amortization of the finance lease right-of-use asset:

1Debit   Amortization Expense
2Credit  Accumulated Amortization

Accrue a probable and reasonably estimable loss contingency:

1Debit   Loss
2Credit  Liability

If the loss is only reasonably possible, recognition is generally not appropriate, but disclosure may be required.

Worked Mini-Example

Assume a company issues a $100,000 bond at a discount. The stated annual rate is 10%, the market yield is 12%, annual interest is paid in cash, and the beginning carrying amount is $96,535.80.

[ \text{Cash interest} = 100{,}000 \times 10% = 10{,}000 ]

[ \text{Interest expense} = 96{,}535.80 \times 12% = 11{,}584.30 ]

[ \text{Discount amortization} = 11{,}584.30 - 10{,}000 = 1{,}584.30 ]

The entry is:

1Debit   Interest Expense                 11,584.30
2Credit  Discount on Bonds Payable         1,584.30
3Credit  Cash                             10,000.00

After the entry, the bond’s carrying amount is $98,120.10. The discount credit reduces the unamortized discount, which increases the net carrying amount of the debt.

Final Review Checklist

• Identify whether the task is asking for measurement, recognition, presentation, or disclosure.
• Match numerator, denominator, and period before computing a ratio.
• Separate cash paid from expense recognized.
• Use carrying amount, not face amount, for effective-interest calculations.
• Trace every journal entry to at least one financial statement effect.
• For simulations, label accounts carefully before entering amounts.

Quiz: Formulas, Ratios, and Entry Patterns