1. C13 - 1 Chapter 13 Corporations: Income and Taxes, Stockholders’ Equity and Investments in Stocks

2. C13 - 2 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

3. C13 - 3 Corporate Income Taxes 4 Corporations are taxable entities that must pay income taxes. 4 Taxable income is determined according to tax laws which are often different from income before income tax according to GAAP. 4 Differences in tax law and GAAP create some temporary differences that reverse in later years. 4 Temporary differences do not change or reduce the total amount of tax paid, they affect only the timing of when the taxes are paid.

4. C13 - 4 Temporary Differences in Reporting Revenues Report NowTaxable Later Report LaterTaxable 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

5. C13 - 5 Temporary Differences in Reporting Expenses Deduct NowDeduct Later Deduct SlowerDeduct Faster Example: Product warranty expense. When Estimated When Paid Financial Reporting Tax Reporting Example: Methods of depreciation. Straight-Line Method MACRS Method Expense Deductions

6. C13 - 6 DateDescriptionDebitCredit DateDescriptionDebitCredit (p.512-513) Income Tax Accounting Income Tax Expense120,000 Income Tax Payable40,000 Deferred Income Tax Payable80,000 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.

7. C13 - 7 DateDescriptionDebitCredit DateDescriptionDebitCredit 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 Expense120,000 Income Tax Payable40,000 Deferred Income Tax Payable80,000 The income tax expense is deducted from the income before tax reported on the income statement. 1st Yr.

8. C13 - 8 DateDescriptionDebitCredit DateDescriptionDebitCredit 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 Expense120,000 Income Tax Payable40,000 Deferred Income Tax Payable80,000 The income tax payable is based on the taxable income and is a current liability due and payable. 1st Yr.

9. C13 - 9 DateDescriptionDebitCredit DateDescriptionDebitCredit 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 Expense120,000 Income Tax Payable40,000 Deferred Income Tax Payable80,000 The deferred income tax payable is a deferred liability due later as the timing differences reverse and the taxes become due. 1st Yr.

10. C13 - 10 More example p.534 Ex.13-1 April15Income Tax Expense80,000 Cash80,000 June15Income Tax Expense80,000 Cash80,000 Sept.15Income Tax Expense80,000 Cash80,000

11. C13 - 11 More example p.534 Ex.13-1 Dec.31Income Tax Expense240,000* Income Tax Payable100,000** Deferred Income Tax Payable140,000 *[($1,200,000 × 40%) – (3 × $80,000)] = $240,000 **[($850,000 × 40%) – (3 × $80,000)] = $100,000 Jan.15Income Tax Payable100,000 Cash 100,000

12. C13 - 12 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.

13. C13 - 13 Jones Corporation Income Statement For the Year Ended December 31, 2003 Net sales$9,600,000 Income from continuing operations before income tax$1,310,000 Income tax620,000 Income from continuing operations$ 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 $65,000150,000 Cumulative effect on prior years of changing to different depreciation method (Note B)92,000 Net income$832,000

14. C13 - 14 Jones Corporation Income Statement For the Year Ended December 31, 2003 Net sales$9,600,000 Income from continuing operations before income tax$1,310,000 Income tax620,000 Income from continuing operations$ 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 $65,000150,000 Cumulative effect on prior years of changing to different depreciation method (Note B)92,000 Net income$832,000

15. C13 - 15 Jones Corporation Income Statement For the Year Ended December 31, 2003 Net sales$9,600,000 Income from continuing operations before income tax$1,310,000 Income tax620,000 Income from continuing operations$ 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 $65,000150,000 Cumulative effect on prior years of changing to different depreciation method (Note B)92,000 Net income$832,000

16. C13 - 16 Jones Corporation Income Statement For the Year Ended December 31, 2003 Net sales$9,600,000 Income from continuing operations before income tax$1,310,000 Income tax620,000 Income from continuing operations$ 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 $65,000150,000 Cumulative effect on prior years of changing to different depreciation method (Note B)92,000 Net income$832,000

17. C13 - 17 Reporting 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:

18. C13 - 18 Jones Corporation Income Statement For 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 principle2.95 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

19. C13 - 19 Paid-in capital Paid-in capital: Preferred $5 stock, cumulative, $50 par (2,000 shares authorized and issued)$100,000 Excess of issue price over par10,000$ 110,000 Common stock, $20 par (50,000 shares authorized, 45,000 issued) $900,000 Excess of issue price over par132,0001,032,000 From donated land60,000 Total paid-in capital$1,202,000 (p.517) Stockholders’ Equity

20. C13 - 20 Stockholders’ Equity Paid-in capital Paid-in capital: Preferred $5 stock, cumulative, $50 par (2,000 shares authorized and issued)$100,000 Excess of issue price over par10,000$ 110,000 Common stock, $20 par (50,000 shares authorized, 45,000 issued) $900,000 Excess of issue price over par132,0001,032,000 From donated land60,000 Total paid-in capital$1,202,000 Contributed capital 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 capital202,000 Total contributed capital$1,202,000 Shareholders’ Equity

21. C13 - 21 Adang Corporation Retained Earnings Statement For the Year Ended June 30, 2003 Reporting Retained Earnings Retained earnings, July 1, 2002$350,000 Net income$280,000 Less dividends declared75,000 Increase in retained earnings205,000 Retained earnings, June 30, 2003$555,000

22. C13 - 22 Analyzing Stock Investments Accounting: Earnings Per Share Net Income Common Shares Investing: Price - Earnings Ratio Market Price Per Share Earnings Per Share Earnings Per Share = Price- Earnings Ratio =

23. C13 - 23 Price – 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 ratio12.5 10.0

24. C13 - 24 HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise: 13-9, 13-10 2.Problem : Discussion:

25. C13 - 25 The end of Chapter 13