c13 - 1 chapter 13 corporations: income and taxes, stockholders’ equity and investments in stocks
TRANSCRIPT
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Chapter 13 Corporations: Income and Taxes,
Stockholders’ Equity and Investments in Stocks
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Learning Objectives
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
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Corporate Income TaxesCorporate Income Taxes
Corporations are taxable entities that must pay income taxes.
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.
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Temporary Differences in Reporting RevenuesTemporary Differences in Reporting Revenues
Report NowReport Now Taxable LaterTaxable Later
Report LaterReport Later Taxable NowTaxable Now
Example: Income reporting methods.
Point-of-Sale Method
Installment Method
FinancialReporting
TaxReporting
Example: Cash collected in advance.
WhenEarned
WhenCollected
RevenueReporting
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Temporary Differences in Reporting ExpensesTemporary Differences in Reporting Expenses
Deduct NowDeduct Now Deduct LaterDeduct Later
Deduct SlowerDeduct Slower Deduct FasterDeduct Faster
Example: Product warranty expense.
WhenEstimated
WhenPaid
FinancialReporting
TaxReporting
Example: Methodsof depreciation.
Straight-LineMethod
MACRSMethod
ExpenseDeductions
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DateDate DescriptionDescription DebitDebit CreditCredit
(p.512-513) Income Tax Accounting(p.512-513) Income Tax Accounting
Income Tax Expense 120,000Income Tax Payable 40,000Deferred 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.
Financial reporting and tax reporting summary:Income before tax $300,000 x 40% rate = $120,000Taxable income $100,000 x 40% rate = $40,000
Record $48,000 of deferred tax as payable.
2nd Yr.
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DateDate DescriptionDescription DebitDebit CreditCredit
Income Tax AccountingIncome Tax Accounting
Financial reporting and tax reporting summary:Income before tax $300,000 x 40% rate = $120,000Taxable income $100,000 x 40% rate = $40,000
Income Tax Expense 120,000Income Tax Payable 40,000Deferred Income Tax Payable 80,000
The income tax expense is deducted from the income before tax reported on the income statement.
The income tax expense is deducted from the income before tax reported on the income statement.
1st Yr.
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DateDate DescriptionDescription DebitDebit CreditCredit
Income Tax AccountingIncome Tax Accounting
Financial reporting and tax reporting summary:Income before tax $300,000 x 40% rate = $120,000Taxable income $100,000 x 40% rate = $40,000
Income Tax Expense 120,000Income Tax Payable 40,000Deferred Income Tax Payable 80,000
The income tax payable is based on the taxable income and is a current liability due and payable.
The income tax payable is based on the taxable income and is a current liability due and payable.
1st Yr.
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DateDate DescriptionDescription DebitDebit CreditCredit
Income Tax AccountingIncome Tax Accounting
Financial reporting and tax reporting summary:Income before tax $300,000 x 40% rate = $120,000Taxable income $100,000 x 40% rate = $40,000
Income Tax Expense 120,000Income Tax Payable 40,000Deferred Income Tax Payable 80,000
The deferred income tax payable is a deferred liability due later as the timing differences reverse and the taxes become due.
The deferred income tax payable is a deferred liability due later as the timing differences reverse and the taxes become due.
1st Yr.
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More example p.534 Ex.13-1
April 15 Income Tax Expense 80,000Cash 80,000
June 15 Income Tax Expense 80,000
Cash 80,000 Sept. 15 Income Tax Expense 80,000
Cash 80,000
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More example p.534 Ex.13-1
Dec.31 Income Tax Expense 240,000* Income Tax Payable 100,000** Deferred Income Tax Payable 140,000
*[($1,200,000 × 40%) – (3 × $80,000)] = $240,000**[($850,000 × 40%) – (3 × $80,000)] = $100,000
Jan. 15 Income Tax Payable 100,000 Cash 100,000
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Unusual Income Statement ItemsUnusual 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.
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Jones CorporationIncome Statement
For the Year Ended December 31, 2003
Net sales $9,600,000
Income from continuing operationsbefore 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 ofapplicable income tax of $65,000 150,000
Cumulative effect on prior years of changing todifferent depreciation method (Note B) 92,000
Net income $832,000
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Jones CorporationIncome Statement
For the Year Ended December 31, 2003
Net sales $9,600,000
Income from continuing operationsbefore 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 ofapplicable income tax of $65,000 150,000
Cumulative effect on prior years of changing todifferent depreciation method (Note B) 92,000
Net income $832,000
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Jones CorporationIncome Statement
For the Year Ended December 31, 2003
Net sales $9,600,000
Income from continuing operationsbefore 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 ofapplicable income tax of $65,000 150,000
Cumulative effect on prior years of changing todifferent depreciation method (Note B) 92,000
Net income $832,000
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Jones CorporationIncome Statement
For the Year Ended December 31, 2003
Net sales $9,600,000
Income from continuing operationsbefore 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 ofapplicable income tax of $65,000 150,000
Cumulative effect on prior years of changing todifferent depreciation method (Note B) 92,000
Net income $832,000
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Reporting Earnings Per Common ShareReporting Earnings Per Common Share
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.
Earnings per share (EPS) is the net income per share of common stock outstanding. When unusual items exist, EPS should be reported for:
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Jones CorporationIncome Statement
For the Year Ended December 31, 2003
Income from continuing operations $690,000
Net income $832,000
Earnings per common share: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
Number of common shares outstanding: 200,000
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Paid-in capitalPaid-in capital:Preferred $5 stock, cumulative, $50 par (2,000 shares authorized and issued) $100,000Excess of issue price over par 10,000 $ 110,000Common stock, $20 par (50,000 shares authorized, 45,000 issued) $900,000Excess of issue price over par 132,000 1,032,000From donated land 60,000 Total paid-in capital $1,202,000
(p.517) Stockholders’ Equity(p.517) Stockholders’ Equity
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Stockholders’ EquityStockholders’ Equity
Paid-in capitalPaid-in capital:Preferred $5 stock, cumulative, $50 par (2,000 shares authorized and issued) $100,000Excess of issue price over par 10,000 $ 110,000Common stock, $20 par (50,000 shares authorized, 45,000 issued) $900,000Excess of issue price over par 132,000 1,032,000From donated land 60,000 Total paid-in capital $1,202,000
Contributed capitalContributed capital:Preferred 10% stock, cumulative, $50 par (2,000 shares authorized and issued) $100,000Common stock, $20 par (50,000 shares authorized, 45,000 issued) $900,000Additional paid-in capital 202,000 Total contributed capital $1,202,000
Shareholders’ EquityShareholders’ Equity
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Adang CorporationRetained Earnings Statement
For the Year Ended June 30, 2003
Reporting Retained EarningsReporting 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
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Analyzing Stock InvestmentsAnalyzing Stock Investments
Accounting: Earnings Per ShareAccounting: Earnings Per Share
Net Income
Common Shares
Investing: Price - Earnings RatioInvesting: Price - Earnings Ratio
Market Price Per ShareEarnings Per Share
EarningsPer Share=
Price-Earnings
Ratio=
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Price – Earnings RatioPrice – Earnings Ratio
The price-earnings ratio represents how much the market is willing to pay per dollar of a company’s earnings. This indicates the market’s assessment of a firm’s growth potential and future earnings prospects.
The price-earnings ratio indicates that a share of common stock was selling for 10 times earnings for 2002 and 12.5 times for 2003.
An example: 2003 2002
Market price per share $20.50 $13.50
Earnings per share $1.64 $1.35
Price-earnings ratioPrice-earnings ratio 12.5 12.5 10.0 10.0
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HOME WORK
READING:1. Illustrative problem2. Self- examination questions3. Multiple choice
Writing:1. Exercise: 13-9, 13-102. Problem :
Discussion:
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The end of Chapter 13