Chapter F12 Power notes 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 c12-1
C12 - 1 Learning Objectives Power Notes 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 Chapter F12 C12 Corporations: Income and Taxes, Stockholders’ Equity, Investments in Stocks
Chapter F12 Power notes Corporations: Income and Taxes Stockholders' Equity, Investments in Stocks Slide i Power Note Topics 3. Corporate Income Taxes 10. Unusual Income Statement Items 16. Earnings per common Share 22.Reporting Stockholders'Equity 28.Long-Term Stock Investments 36. Business Combinations 38. Price-Earnings Ratio t Note: To select a topic, type the slide# and press Enter c12-2
C12 - 2 • Corporate Income Taxes • Unusual Income Statement Items • Earnings Per Common Share • Reporting Stockholders’ Equity • Long-Term Stock Investments • Business Combinations • Price-Earnings Ratio Slide # Power Note Topics 3 10 16 22 28 36 38 Note: To select a topic, type the slide # and press Enter. Chapter F12 Power Notes Corporations: Income and Taxes, Stockholders’ Equity, Investments in Stocks
Corporate Income Taxes Corporations are taxable entities that must pay ncome 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 c12-3
C12 - 3 Corporate 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
Temporary Differences in Reporting Revenues Financial Tax Revenue Reporting Reporting Reporting Report Now Taxable Later Example: Income Point-of-sale Installment reporting methods. Method Method Report Later Taxable now Example: Cash When When collected in advance Earned Collected c12-4
C12 - 4 Temporary Differences in Reporting Revenues Report Now Taxable Later Report Later Taxable Now Example: Income reporting methods. Point-of-Sale Method Installment Method Financial Reporting Tax Reporting Example: Cash collected in advance. When Earned When Collected Revenue Reporting
Temporary Differences in Reporting Expenses Financial Tax Expense Deductions Reporting Reporting Deduct now Deduct later Example: Product When When warranty expense. Estimated Paid Deduct Slower Deduct faster Example: Methods Straight-Line MACRS of depreciation Method Method c125
C12 - 5 Temporary Differences in Reporting Expenses Deduct Now Deduct Later Deduct Slower Deduct Faster Example: Product warranty expense. When Estimated When Paid Financial Reporting Tax Reporting Example: Methods of depreciation. Straight-Line Method MACRS Method Expense Deductions
Income 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 Dat Description Debit Credit 1st Yr. Income Tax Expense 120.000 Income Tax Payable 40.000 Deferred Income Tax Payable 80.000 Income tax allocation due to timing differences 2nd Yr. Deferred Income Tax Payable 48,000 Income Tax Payable 48,000 Record $48, 000 of deferred tax as payable. c12-6
C12 - 6 Date Description Debit Credit Income Tax Accounting 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. 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 Record $48,000 of deferred tax as payable. 2nd Yr
Income 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 1st Yr. Income Tax Expense 120.000 Income Tax Payable 40.000 Deferred Income Tax Payable 80.000 The income tax expense is deducted from the income before tax reported on the income statement c12-7
C12 - 7 Date Description Debit Credit Income 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 Income Tax Expense 120,000 Income Tax Payable 40,000 Deferred Income Tax Payable 80,000 The income tax expense is deducted from the income before tax reported on the income statement. 1st Yr
Income 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 1st Yr. Income Tax Expense 120,000 Income Tax Payable 40.000 Deferred Income Tax Payable 80.000 The income tax payable is based on the taxable income and is a current liability due and payable. c128
C12 - 8 Date Description Debit Credit Income 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 Income Tax Expense 120,000 Income Tax Payable 40,000 Deferred Income Tax Payable 80,000 The income tax payable is based on the taxable income and is a current liability due and payable. 1st Yr
Income 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 Dat Description Debit Credit 1st Yr. Income Tax Expense 120.000 Income Tax Payable In 000 Deferred 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 c12-9
C12 - 9 Date Description Debit Credit Income 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 Income Tax Expense 120,000 Income Tax Payable 40,000 Deferred 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. 1st Yr
Unusual 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. c12-10
C12 - 10 Unusual 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
