Income%20Taxes,%20Unusual%20Income%20Tax%20Items,%20and%20Investments%20in%20Stocks - PowerPoint PPT Presentation

About This Presentation
Title:

Income%20Taxes,%20Unusual%20Income%20Tax%20Items,%20and%20Investments%20in%20Stocks

Description:

Income Taxes, Unusual Income Tax Items, and Investments in Stocks ... The entry to record income taxes on April 15 reflects the deferred amount of $80, ... – PowerPoint PPT presentation

Number of Views:109
Avg rating:3.0/5.0
Slides: 69
Provided by: thoms87
Category:

less

Transcript and Presenter's Notes

Title: Income%20Taxes,%20Unusual%20Income%20Tax%20Items,%20and%20Investments%20in%20Stocks


1
Chapter 12
Income Taxes, Unusual Income Tax Items, and
Investments in Stocks
Financial and Managerial Accounting 8th
Edition Warren Reeve Fess
PowerPoint Presentation by Douglas
CloudProfessor Emeritus of AccountingPepperdine
University
2
Some of the action has been automated, so click
the mouse when you see this lightning bolt in the
lower right-hand corner of the screen. You can
point and click anywhere on the screen.
3
Objectives
1. Journalize the entries for corporate income
taxes, including deferred income
taxes. 2. Prepare an income statement reporting
the following unusual items fixed asset
impairments, restructuring charges, discontinued
operations, extraordinary items, and changes in
accounting principles. 3. Prepare an income
statement reporting earnings per share data.
After studying this chapter, you should be able
to
4
Objectives
4. Describe the concept and the reporting of
comprehensive income.
5. Describe the accounting for investments in
stocks. 6. Describe alternative methods of
combining businesses and how consolidated
financial statements are prepared. 7. Compute and
interpret the price-earnings ratio.
5
Corporate Income Taxes
6
Corporate Income Taxes
A corporation makes four income tax installment
payments throughout the year.
Assume that a corporation estimates its taxes for
the year to be 84,000.
7
Corporate Income Taxes
On April 15, the first of four estimated annual
tax payments of 21,000 is made.
Apr. 15 Income Tax Expense 21 000 00
Cash 21 000 00
To record quarterly payment of estimated income
tax.
8
Corporate Income Taxes
Ratio of Reported Income Tax Expense to Earnings
Before Taxes for Selected Industries
Automobiles 33 Banking 35 Computers 35 Food 35 In
tegrated oil 39 Pharmaceutical 30 Retail 39 Teleco
mmunication 17 Transportation 38
9
Allocating Income Taxes
  • 1. Revenues or gains are taxed after they are
    reported in the income statement.
  • 2. Expenses or losses are deducted in determining
    taxable income after they are reported in the
    income statement.
  • 3. Revenues or gains are taxed before they are
    reported on the income statement.
  • 4. Expenses or losses are deducted in determining
    taxable income before they are reported in the
    income statement.

10
Temporary Differences
  • 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.

11
Temporary Differences
MACRS (tax depreciation)
Straight-line (financial statement depreciation)
12
Temporary Differences
Temporary 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
13
Temporary Differences
Temporary 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
14
Temporary Differences
At the end of the first year of operations, a
corporation reports 300,000 income before income
taxes. With a 40 tax rate, the firm faces a tax
of 120,000. Using tax planning, the net income
is reduced to 100,000 and the actual income tax
due is 40,000. The difference is deferred to
future years.
15
Temporary Differences
The entry to record income taxes on April 15
reflects the deferred amount of 80,000.
Apr. 15 Income Tax Expense 120 000 00
Income Tax Payable 40 000 00 Deferred
Income Tax Payable 80 000 00
To record income tax for the year.
16
Temporary Differences
If 48,000 of the deferred tax reverses and
becomes due in the second year, the entry will
reflect this fact.
Apr. 15 Deferred Income Tax Payable 48 000 00
Income Tax Payable 48 000 00
To record current liability for deferred tax.
17
Permanent Differences
Differences between taxable income and income
before taxes reported on the income statement may
be the result of differences that never reverse.
18
Permanent Differences
These differences are referred to as permanent
differences. Interest on municipal bonds is an
example of this type of timing difference.
19
Unusual Items Affecting the Income Statement
Unusual Items Affecting Income from Continuing
Operations
20
Unusual Items Affecting the Income Statement
Fixed Asset Impairments
  • Decrease in market price of fixed assets
  • Significant changes in the business or
    regulations related to fixed assets
  • Adverse conditions affecting the use of fixed
    assets
  • Expected cash flow losses using fixed assets

21
Unusual Items Affecting the Income Statement
Fixed Asset Impairments
On March 1, Jones Company consolidates operations
by closing a factory. As a result of the
closing, plant and equipment is impaired by
750,000.
22
Unusual Items Affecting the Income Statement
Fixed Asset Impairments
Mar. 1 Loss on Fixed Asset Impairment 750 000 00
Fixed AssetsPlant 400 000 00 Fixed
AssetsEquipment 350 000 00
To record impairment of fixed assets due to plant
closing.
23
Jones Corporation Partial Income Statement For
the Year Ended December 31, 2006
Net sales 12,350,000 Cost of merchandise sold
5,800,000 Gross profit 6,550,000 Operating
expenses 3,490,000 Restructuring
charge 1,000,000 Loss from asset impairment
750,000 5,240,000 Income from continuing
operations before income tax
1,310,000 Income tax expense
620,000 Income from continuing operations
690,000
24
Unusual Items Affecting the Income Statement
Restructuring charges are costs associated with
involuntarily terminating employees, terminating
contracts, consolidating facilities, or
relocating employees.
25
Unusual Items Affecting the Income Statement
Fixed Asset Impairments
The management of Jones Company communicate a
plan to terminate 200 employees from the closed
manufacturing plant on March 1. The plan calls
for a termination benefit of 5,000 per employee.
26
Unusual Items Affecting the Income Statement
Restructuring Charges
Mar. 1 Restructuring Charge 1000 000 00
Employee Termination Obligation 1000 000 00
To record restructuring charge due to plant
closing.
27
Unusual Items Affecting the Income Statement
Restructuring Charges
Mar. 1 Restructuring Charge 1000 000 00
Employee Termination Obligation 1000 000 00
Mar. 25 Employee Termination Obligation
125 000 00
Cash
125 000 00
28
Unusual Items Not Affecting Income From
Continuing Operations
29
Discontinued Operations
A gain or loss from disposing of a business
segment is reported as a gain or loss from
discontinued operations.
30
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Net sales 12,350,000 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 B)
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 Cumulati
ve effect on prior years of changing
to different depreciation method (Note C)
92,000 Net income 832,000
31
Extraordinary Items
Extraordinary items result from events and
transactions that (1) are significantly different
from the typical or the normal operating
activities of the business AND (2) occur
infrequently.
32
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Net sales 12,350,000 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 B)
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 Cumulati
ve effect on prior years of changing
to different depreciation method (Note C)
92,000 Net income 832,000
33
Accounting Changes
Accounting changes occur when a business
voluntarily change from one generally accepted
accounting principle to another.
34
Accounting Changes
Another type of accounting change occurs when
businesses are required to change the way they
treat an accounting situation when the FASB
issues a new accounting standard.
35
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Net sales 12,350,000 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 BA)
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 Cumulati
ve effect on prior years of changing
to different depreciation method (Note C)
92,000 Net income 832,000
36
Earnings Per Common Share
37
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
  • Income from continuing operations
  • Income before extraordinary items and the
    cumulative effect of a change in accounting
    principle
  • Extraordinary items and the cumulative effect of
    a change in accounting principle
  • Net income

38
Earnings per Common Share
If there is no preferred stock
If there is preferred stock
39
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Income from continuing operations 690,000
Net income 832,000 Earnings per common
share Income from continuing operations
3.45 Loss on discontinued operations (Note B)
.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
40
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Income from continuing operations 690,000
Net income 832,000 Earnings per common
share Income from continuing operations
3.45 Loss on discontinued operations (Note B)
.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
41
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Income from continuing operations 690,000
Net income 832,000 Earnings per common
share Income from continuing operations
3.45 Loss on discontinued operations (Note B)
. 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
42
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Income from continuing operations 690,000
Net income 832,000 Earnings per common
share Income from continuing operations
3.45 Loss on discontinued operations (Note B)
.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
43
Jones CorporationIncome StatementFor the Year
Ended December 31, 2006
Income from continuing operations 690,000
Net income 832,000 Earnings per common
share Income from continuing operations
3.45 Loss on discontinued operations (Note B)
.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
44
Comprehensive Income
Companies may report comprehensive income on the
income statement, in a separate statement, or in
the statement of stockholders equity.
45
Comprehensive Income
However, comprehensive income does not include
changes caused by issuing dividends or from
stockholders investments.
Comprehensive income is defined as all changes in
stockholders equity during a period.
46
Stockholders Equity Section
  • Stockholders equity
  • Common stock 20,000 20,000
  • Paid-in capital in excess of par 36,000 36,000
  • Retained earnings 165,500 157,000
  • Accumulated other
  • comprehensive income 1,290 1,200
  • Total stockholders equity 222,790 214,200

2006 2005
47
ACCOUNTING FOR INVESTMENTS IN STOCKS
Trading securities are securities that management
intends to actively trade for profit. Available-fo
r-sale securities are securities that management
expects to sell in the future, but which are not
actively traded for profit.
48
Short-Term Investments in Stocks
Temporary investments are recorded in the current
asset account, Marketable Securities, at their
cost.
49
Short-Term Investments in Stocks
On June 1, Crabtree Company purchased 2,000
shares of Inis Corporation common stock at 89.75
per share plus a brokerage fee of 500.
89.75 x 2,000 shares 500
June 1 Marketable Securities 180 000 00
Cash 180 000 00
Purchased 2,000 shares of Inis Corporation common
stock.
50
Short-Term Investments in Stocks
On October 1, Inis declared a 0.90 per share
dividend payable on November 30.
2,000 shares x 0.90
Nov. 30 Cash 1 800 00
Dividend Revenue 1 800 00
Received dividend on Inis Corporation common
stock.
51
Short-Term Investments in Stocks
On the balance sheet, temporary investments are
reported at their fair market value. Any
difference between the fair market value and the
cost is an unrealized holding gain or loss.
52
Short-Term Investments in Stocks
At year-end, the total cost of Crabtree Co.s
four temporary investments is 690,000. The
current market for these four items totaled
750,000 at year-end. Thus, Crabtree Co. had a
before tax unrealized gain of 60,000.
53
Short-Term Investments in Stocks
Crabtree Co. Balance Sheet December 31, 2006
Current assets Cash 119,500 Temporary
investments in marketable securities at
cost 690,000 Plus unrealized gain (net of
applicable income tax of 18,000)
42,000 732,000
Stockholders Equity Accumulated other
comprehensive income 42,000
54
Short-Term Investments in Stocks
Crabtree Co. Statement of Comprehensive
Income For the Year Ended December 31, 2006
Net income 720,000 Other comprehensive
income Unrealized gain on temporary
investments in marketable securities (net
of applicable tax of 18,000)
42,000 Comprehensive income 762,000
55
Long-Term Investments in Stocks
Long-term investments are those investments made
by a firm that are not intended as a source of
cash in the normal operations of the business.
56
Long-Term Investments in Stocks
Ownership
100
Controlling Interest
With less than 20 ownership the buyer does not
usually have significant influence. The buyer
uses the cost method to account for the
investment.
Equity Method
50
Significant influence
20
Cost Method
Not significant influence
0
57
Long-Term Investments in Stocks
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
No significant influence
0
58
Long-Term Investments in Stocks
On January 2, Hally Inc. pays cash of 350,000
for 40 of Brock Corporations common stock.
Jan. 2 Investment in Brock Corp. Stock 350
000 00
Cash 350 000 00
Purchased 40 of Brock Corp. common stock.
59
Long-Term Investments in Stocks
For the year ending December 31, Brock
Corporation reports net income of 105,000.
Dec. 31 Investment in Brock Corp. Stock 42
000 00
Income of Brock Corp. 42 000 00
Recorded share (40) of Brock Corp. net income of
105,000.
60
Long-Term Investments in Stocks
On December 31, Brock Corporation declared a
45,000 dividend, payable on December 31.
Dec. 31 Cash 18 000 00
Investment in Brock Crop. Stock 18 000 00
Recorded share (40) of dividends of 45,000 paid
by Brock Corp.
61
Long-Term Investments in Stocks
On March 1, an investment in Drey Inc. stock that
had a carrying amount of 15,700 is sold for
17,500.
Mar. 1 Cash 17 500 00
Investment in Drey Inc. Stock 15 700
00 Gain on Sale of Investments 1 800 00
Sold investment in Drey Inc. stock.
62
Business Combinations
63
Business Combinations
  • A merger combines two corporations by one
    acquiring the properties of another that is then
    dissolved.
  • Many businesses combine in order to produce more
    efficiently or to diversify product lines.
  • A consolidation is the creation of a new
    corporation, to which the combined assets and
    liabilities of the old corporations are
    transferred to the new corporation.

64
Business Combinations
Mergers
A
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.
65
FINANCIAL ANALYSIS AND INTERPRETATION
A firms growth potential and future earnings
prospects are indicated by how much the market is
willing to pay per dollar of a companys earnings.
66
Price-Earnings Ratio
67
Price-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 2006 2005 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 2005 and 12.5 times for 2006.
68
Chapter 12
The End
Write a Comment
User Comments (0)
About PowerShow.com