Chapter 4 of 6Area II, 30–40% of exam

Area II: Investments, Liabilities, Debt and Equity

This part of Area II covers investments in debt and equity securities, accrued liabilities, bonds and notes, debt modifications and equity transactions. Expect to measure carrying amounts, amortize premiums and discounts and record equity changes.

Investments

Debt securities are classified as trading, available for sale or held to maturity, which sets how they are measured. Equity securities are generally at fair value through net income, with a measurement alternative for those lacking readily determinable fair values. Significant influence brings in the equity method.

Debt security categories

Trading and available-for-sale at fair value (changes to net income and OCI respectively); held-to-maturity at amortized cost.

FASB ASC 320-10-35-1

Equity securities

Measured at fair value through net income; the measurement alternative is cost less impairment adjusted for observable price changes.

FASB ASC 321-10-35-1 and 35-2

AFS credit losses

Credit losses are recognized through an allowance, limited to the excess of amortized cost over fair value.

FASB ASC 326-30-35

Equity method

Presumed at 20% or more of voting stock; the investment rises with the investor's share of earnings and falls with dividends.

FASB ASC 323-10-15-8; ASC 323-10-35

Liabilities, debt and equity

Accrued liabilities include compensated absences, self-insurance, asset retirement and exit obligations, each with its own recognition trigger. Bonds and notes are carried at amortized cost using the interest method, and changes to debt terms are sorted into modifications, extinguishments and troubled debt restructurings. Equity entries cover issuances, stock dividends and splits, and treasury stock.

Asset retirement obligations

Recognized at fair value when incurred, capitalized into the asset, and accreted using the credit-adjusted risk-free rate.

FASB ASC 410-20-30-1 and 35-5

One-time termination benefits

Recognized at communication if no service beyond the minimum retention period is required; otherwise ratably over the service period.

FASB ASC 420-10-25

Interest method and issuance costs

Interest expense is carrying amount times the effective rate; debt issuance costs reduce the debt's carrying amount.

FASB ASC 835-30-35-2 and 45-1A

Ten percent test

A change in cash flows of at least 10% in present value terms makes an exchange or modification an extinguishment.

FASB ASC 470-50-40-10

Small stock dividends

Recorded at the fair value of the shares issued; a stock split changes par value and share count, not total equity.

FASB ASC 505-20-30-3

Keep going: the full CPA Exam — Financial Accounting and Reporting (FAR) guide covers every section of the exam. CPA FAR Study Guide — 2026 Edition — PDF + EPUB, $24.99 · 14-day refund →

Practice this topic →← All chapters

Studying in order?

Practice stays free. The full CPA Exam — Financial Accounting and Reporting (FAR) study guide is the material itself, taught start to finish — a downloadable PDF + EPUB you keep.

Get the book — $24.99