Title: 1'Corporate Income Taxes
1Power Notes
Chapter F12
Corporations Income and Taxes,
Stockholders Equity, Investments in Stocks
Learning Objectives
C12
- 1. Corporate Income Taxes
- 2. Unusual Income Statement Items
- 3. Earnings Per Common Share
- 4. Reporting Stockholders Equity
- 5. Comprehensive Income
- 6. Accounting for Investment in Stocks
- 7. Business Combinations
- 8. Financial Analysis and Interpretation
2Power Notes
Chapter F12
Corporations Income and Taxes,
Stockholders Equity, Investments in Stocks
Slide Power Note Topics
- Corporate Income Taxes
- Unusual Income Statement Items
- Earnings Per Common Share
- Reporting Stockholders Equity
- Long-Term Stock Investments
- Business Combinations
- Price-Earnings Ratio
3 10 16 22 28 36 38
Note To select a topic, type the slide and
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3Corporate Income Taxes
- Corporations are taxable entities that must pay
income taxes. - Because income tax is often a significant amount,
it is reported as a special deduction. - Taxable income is determined according to tax
laws which are often different from income before
income tax according to GAAP. - Differences in tax law and GAAP create some
temporary differences that reverse in later
years. - Temporary differences do not change or reduce the
total amount of tax paid, they affect only the
timing of when the taxes are paid.
4Temporary Differences in Reporting Revenues
Tax Reporting
Financial Reporting
Revenue Reporting
Report Now Taxable Later Report
Later Taxable Now
Example Income reporting methods.
Point-of-Sale Method
Installment Method
Example Cash collected in advance.
When Earned
When Collected
5Temporary Differences in Reporting Expenses
Tax Reporting
Financial Reporting
Expense Deductions
Deduct Now Deduct Later Deduct
Slower Deduct Faster
Example Product warranty expense.
When Estimated
When Paid
Example Methods of depreciation.
Straight-Line Method
MACRS Method
6Income Tax Accounting
Financial reporting and tax reporting
summary Income before tax 300,000 x 40 rate
120,000 Taxable income 100,000 x 40 rate
40,000
Date Description Debit Credit
- Income Tax Expense 120,000
- Income Tax Payable 40,000
- Deferred Income Tax Payable 80,000
- Deferred Income Tax Payable 48,000
- Income Tax Payable 48,000
1st Yr.
Income tax allocation due to timing differences.
2nd Yr.
Record 48,000 of deferred tax as payable.
7Income Tax Accounting
Financial reporting and tax reporting
summary Income before tax 300,000 x 40 rate
120,000 Taxable income 100,000 x 40 rate
40,000
Date Description Debit Credit
- Income Tax Expense 120,000
- Income Tax Payable 40,000
- Deferred Income Tax Payable 80,000
1st Yr.
The income tax expense is deducted from the
income before tax reported on the income
statement.
8Income Tax Accounting
Financial reporting and tax reporting
summary Income before tax 300,000 x 40 rate
120,000 Taxable income 100,000 x 40 rate
40,000
Date Description Debit Credit
- Income Tax Expense 120,000
- Income Tax Payable 40,000
- Deferred Income Tax Payable 80,000
1st Yr.
The income tax payable is based on the taxable
income and is a current liability due and payable.
9Income Tax Accounting
Financial reporting and tax reporting
summary Income before tax 300,000 x 40 rate
120,000 Taxable income 100,000 x 40 rate
40,000
Date Description Debit Credit
- Income Tax Expense 120,000
- Income Tax Payable 40,000
- Deferred Income Tax Payable 80,000
1st Yr.
The deferred income tax payable is a deferred
liability due later as the timing differences
reverse and the taxes become due.
10Unusual Income Statement Items
- Three types of unusual items are
- 1. Results of discontinued operations.
- 2. Extraordinary items of gain or loss.
- 3. A change from one generally accepted
accounting principle to another. - These items and the related tax effects are
reported separately in the income statement.
11Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Net sales 9,600,000
- Income from continuing operations
- before income tax 1,310,000
- Income tax 620,000
- Income from continuing operations 690,000
- Loss on discontinued operations (Note A) 100,000
- Income before extraordinary items and cumulative
- effect of a change in accounting principle
590,000 - Extraordinary item
- Gain on condemnation of land, net of
- applicable income tax of 65,000 150,000
- Cumulative effect on prior years of changing to
- different depreciation method (Note B) 92,000
12Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Net sales 9,600,000
- Income from continuing operations
- before income tax 1,310,000
- Income tax 620,000
- Income from continuing operations 690,000
- Loss on discontinued operations (Note A) 100,000
- Income before extraordinary items and cumulative
- effect of a change in accounting principle
590,000 - Extraordinary item
- Gain on condemnation of land, net of
- applicable income tax of 65,000 150,000
- Cumulative effect on prior years of changing to
- different depreciation method (Note B) 92,000
13Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Net sales 9,600,000
- Income from continuing operations
- before income tax 1,310,000
- Income tax 620,000
- Income from continuing operations 690,000
- Loss on discontinued operations (Note A) 100,000
- Income before extraordinary items and cumulative
- effect of a change in accounting principle
590,000 - Extraordinary item
- Gain on condemnation of land, net of
- applicable income tax of 65,000 150,000
- Cumulative effect on prior years of changing to
- different depreciation method (Note B) 92,000
Differences created by unusual items
discontinued operations, extraordinary items, and
change in methods.
14Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Net sales 9,600,000
- Income from continuing operations
- before income tax 1,310,000
- Income tax 620,000
- Income from continuing operations 690,000
- Loss on discontinued operations (Note A) 100,000
- Income before extraordinary items and cumulative
- effect of a change in accounting principle
590,000 - Extraordinary item
- Gain on condemnation of land, net of
- applicable income tax of 65,000 150,000
- Cumulative effect on prior years of changing to
- different depreciation method (Note B) 92,000
15Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Net sales 9,600,000
- Income from continuing operations
- before income tax 1,310,000
- Income tax 620,000
- Income from continuing operations 690,000
- Loss on discontinued operations (Note A) 100,000
- Income before extraordinary items and cumulative
- effect of a change in accounting principle
590,000 - Extraordinary item
- Gain on condemnation of land, net of
- applicable income tax of 65,000 150,000
- Cumulative effect on prior years of changing to
- different depreciation method (Note B) 92,000
16Reporting Earnings Per Common Share
Earnings per share (EPS) is the net income per
share of common stock outstanding. When unusual
items exist, EPS should be reported for
- 1. Income from continuing operations.
- 2. Income before extraordinary items and the
cumulative effect of a change in accounting
principle. - 3. Extraordinary items and the cumulative effect
of a change in accounting principle. - 4. Net income.
17Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Income from continuing operations 690,000
- Net income 832,000
- Earnings per common share
- Income from continuing operations 3.45
- Loss on discontinued operations .50
- Income before extraordinary item and cumulative
- effect of a change in accounting
principle 2.95 - Extraordinary item .75
- Cumulative effect on prior years of changing
- to a different depreciation method .46
- Net income 4.16
18Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Income from continuing operations 690,000
- Net income 832,000
- Earnings per common share
- Income from continuing operations 3.45
- Loss on discontinued operations .50
- Income before extraordinary item and cumulative
- effect of a change in accounting
principle 2.95 - Extraordinary item .75
- Cumulative effect on prior years of changing
- to a different depreciation method .46
- Net income 4.16
19Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Income from continuing operations 690,000
- Net income 832,000
- Earnings per common share
- Income from continuing operations 3.45
- Loss on discontinued operations .50
- Income before extraordinary item and cumulative
- effect of a change in accounting
principle 2.95 - Extraordinary item .75
- Cumulative effect on prior years of changing
- to a different depreciation method .46
- Net income 4.16
20Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Income from continuing operations 690,000
- Net income 832,000
- Earnings per common share
- Income from continuing operations 3.45
- Loss on discontinued operations .50
- Income before extraordinary item and cumulative
- effect of a change in accounting
principle 2.95 - Extraordinary item .75
- Cumulative effect on prior years of changing
- to a different depreciation method .46
- Net income 4.16
21Jones CorporationIncome StatementFor the Year
Ended December 31, 2003
- Income from continuing operations 690,000
- Net income 832,000
- Earnings per common share
- Income from continuing operations 3.45
- Loss on discontinued operations .50
- Income before extraordinary item and cumulative
- effect of a change in accounting
principle 2.95 - Extraordinary item .75
- Cumulative effect on prior years of changing
- to a different depreciation method .46
- Net income 4.16
22Stockholders Equity
- Paid-in capital
- Preferred 5 stock, cumulative, 50 par
- (2,000 shares authorized and issued) 100,000
- Excess of issue price over par 10,000 110,000
- Common stock, 20 par
- (50,000 shares authorized, 45,000 issued)
900,000 - Excess of issue price over par 132,000 1,032,000
- From donated land 60,000
- Total paid-in capital 1,202,000
23Stockholders Equity
- Paid-in capital
- Preferred 5 stock, cumulative, 50 par
- (2,000 shares authorized and issued) 100,000
- Excess of issue price over par 10,000 110,000
- Common stock, 20 par
- (50,000 shares authorized, 45,000 issued)
900,000 - Excess of issue price over par 132,000 1,032,000
- From donated land 60,000
- Total paid-in capital 1,202,000
-
Shareholders Equity
Contributed capital Preferred 10 stock,
cumulative, 50 par (2,000 shares authorized
and issued) 100,000 Common stock, 20 par
(50,000 shares authorized, 45,000 issued)
900,000 Additional paid-in capital 202,000
Total contributed capital 1,202,000
24Stockholders Equity
- Paid-in capital
- Preferred 5 stock, cumulative, 50 par
- (2,000 shares authorized and issued) 100,000
- Excess of issue price over par 10,000 110,000
- Common stock, 20 par
- (50,000 shares authorized, 45,000 issued)
900,000 - Excess of issue price over par 132,000 1,032,000
- From donated land 60,000
- Total paid-in capital 1,202,000
-
Shareholders Equity
Contributed capital Preferred 10 stock,
cumulative, 50 par (2,000 shares authorized
and issued) 100,000 Common stock, 20 par
(50,000 shares authorized, 45,000 issued)
900,000 Additional paid-in capital 202,000
Total contributed capital 1,202,000
25Adang CorporationRetained Earnings StatementFor
the Year Ended June 30, 2003
Reporting Retained Earnings
- Retained earnings, July 1, 2002 350,000
- Net income 280,000
- Less dividends declared 75,000
- Increase in retained earnings 205,000
- Retained earnings, June 30, 2003 555,000
26Adang CorporationRetained Earnings StatementFor
the Year Ended June 30, 2003
Reporting Retained Earnings
- Retained earnings, July 1, 2002 350,000
- Net income 280,000
- Less dividends declared 75,000
- Increase in retained earnings 205,000
- Retained earnings, June 30, 2003 555,000
27Adang CorporationRetained Earnings StatementFor
the Year Ended June 30, 2003
Reporting Retained Earnings
- Retained earnings, July 1, 2002 350,000
- Net income 280,000
- Less dividends declared 75,000
- Increase in retained earnings 205,000
- Retained earnings, June 30, 2003 555,000
28Long-Term Stock Investments
Ownership
100
Controlling Interest
Equity Method
50
Significant influence
20
Cost Method
Not significant influence
0
29Long-Term Stock Investments
Ownership
100
Controlling Interest
Equity Method
With less than 20 ownership the buyer does not
usually have significant influence. The buyer
uses the cost method to account for the
investment.
50
Significant influence
20
Cost Method
Not significant influence
0
30Long-Term Stock Investments
Ownership
100
Ownership over 20 usually indicates significant
influence. The buyer uses the equity method to
account for the investment.
Controlling Interest
Equity Method
50
Significant influence
20
Cost Method
Not significant influence
0
31Long-Term Stock Investments
Ownership
100
Controlling Interest
Equity Method
50
The corporation owning all or a majority of the
voting stock is called the parent company. The
controlled corporation is the subsidiary company.
Consolidated financial statements are prepared
which combinine the operating results of the two
entities.
Significant influence
20
Cost Method
Not significant influence
0
32Long-Term Stock Investments
Ownership
100
Controlling Interest
Equity Method
50
Significant influence
20
Cost Method
Not significant influence
0
33Cost Method
The cost method is used when the buyer does not
have significant influence over the operating and
financing activities of the investee.
Date Description Debit Credit
- Investment in Stock 5,940
- Cash 5,940
- Cash 200
- Dividend Revenue 200
Mar. 1
Purchased 100 shares of Compton Corp. stock at
59 plus brokerage fee of 40.
Dec. 31
Received 2 cash dividend from Compton Corp.
34Equity Method
Date Description Debit Credit
- Investment in Brock Corp. Stock 350,000
- Cash 350,000
- Investment in Brock Corp. Stock 42,000
- Income of Brock Corp. 42,000
- Cash 18,000
- Investment in Brock Corp. Stock 18,000
Jan. 2
Purchased 40 of Brock Corporation for 350,000.
Dec. 31
Brock Corporation reports net income of 105,000.
Dec. 31
Brock Corporation reports total dividends of
45,000.
35Sale of Long-Term Stock Investment
When shares of stock are sold, the investment
account is credited for the carrying value (book
value) of the shares sold.
Date Description Debit Credit
- Cash 17,500
- Investment in Stock 15,700
- Gain on Sale of Investments 1,800
Mar. 1
Sold stock of Drey Inc. for 17,500. Stock has a
carrying value of 15,700.
36Business Combinations
- Many businesses combine in order to produce more
efficiently or to diversify product lines. - A merger combines two corporations by one
acquiring the properties of another that is then
dissolved. - A consolidation is the creation of a new
corporation, to which the combined assets and
liabilities of the old corporations are
transferred.
37Business Combinations
Consolidations
Mergers
A
A
C
B
B
- Mergers Company A acquires company B.
- The assets and liabilities of B are transferred
to A and B is then dissolved. - Consolidations Company A acquires company B.
- The assets and liabilities of both A and B are
transferred to a new company C and A and B are
then dissolved.
38Analyzing Stock Investments
Accounting Earnings Per Share
Earnings Per Share
Investing Price - Earnings Ratio
Price- Earnings Ratio
Market Price Per Share Earnings Per Share
39Price Earnings Ratio
The price-earnings ratio represents how much the
market is willing to pay per dollar of a
companys earnings. This indicates the markets
assessment of a firms growth potential and
future earnings prospects.
An example 2000 1999 Market price per
share 20.50 13.50 Earnings per share 1.64
1.35 Price-earnings ratio 12.5 10.0
The price-earnings ratio indicates that a share
of common stock was selling for 10 times earnings
for 1999 and 12.5 times for 2000.
40Power Notes
Chapter F12
Corporations Income and Taxes,
Stockholders Equity, Investments in Stocks
This is the last slide in Chapter F12.