1. Power Notes Chapter 13 Corporations: Income and Taxes,
Stockholders’ Equity, Investments in Stocks
Learning Objectives
C13
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

2. Power Notes Chapter 13 Corporations: Income and Taxes,
Stockholders’ Equity, Investments in Stocks
Slide # Power Note Topics 3 10 16 22 28
36 38
Corporate Income Taxes
Unusual Income Statement Items
Earnings Per Common Share
Reporting Stockholders’ Equity
Long-Term Stock Investments
Business Combinations
Price-Earnings Ratio
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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.

4. Temporary Differences in Reporting Revenues
Financial
Reporting
Tax
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

5. Temporary Differences in Reporting Expenses
Financial
Reporting
Tax
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

6. 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
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.

7. 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
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.

8. 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
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.

9. 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
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.

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.

11. 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 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
Cumulative effect on prior years of changing to
different depreciation method (Note B) 92,000
Net income $832,000

12. 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 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
Cumulative effect on prior years of changing to
different depreciation method (Note B) 92,000
Net income $832,000

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 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
Cumulative effect on prior years of changing to
different depreciation method (Note B) 92,000
Net income $832,000

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 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
Cumulative effect on prior years of changing to
different depreciation method (Note B) 92,000
Net income $832,000

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 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
Cumulative effect on prior years of changing to
different depreciation method (Note B) 92,000
Net income $832,000
Differences created by unusual items: discontinued operations, extraordinary items, and change in methods.

16. Reporting 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.

17. 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 principle 2.95
Extraordinary item .75
Cumulative effect on prior years of changing
to a different depreciation method .46
Net income $ 4.16

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 principle 2.95
Extraordinary item .75
Cumulative effect on prior years of changing
to a different depreciation method .46
Net income $ 4.16

19. 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 principle 2.95
Extraordinary item .75
Cumulative effect on prior years of changing
to a different depreciation method .46
Net income $ 4.16

20. 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 principle 2.95
Extraordinary item .75
Cumulative effect on prior years of changing
to a different depreciation method .46
Net income $ 4.16

21. 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 principle 2.95
Extraordinary item .75
Cumulative effect on prior years of changing
to a different depreciation method .46
Net income $ 4.16

22. Stockholders’ 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

23. Stockholders’ 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

24. Stockholders’ 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

25. Reporting Retained Earnings
Adang Corporation Retained Earnings Statement For the Year Ended June 30, 2003
Retained earnings, July 1, $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings, June 30, $555,000

26. Reporting Retained Earnings
Adang Corporation Retained Earnings Statement For the Year Ended June 30, 2003
Retained earnings, July 1, $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings, June 30, $555,000

27. Reporting Retained Earnings
Adang Corporation Retained Earnings Statement For the Year Ended June 30, 2003
Retained earnings, July 1, $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings, June 30, $555,000

28. Long-Term Stock Investments
Ownership %
100%
Controlling Interest
Equity
Method
50%
Significant
influence
20%
Cost
Method
Not significant
influence 0%

29. Long-Term Stock Investments
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%

30. Long-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%

31. Long-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%

32. Long-Term Stock Investments
Ownership %
100%
Controlling Interest
Equity
Method
50%
Significant
influence
20%
Cost
Method
Not significant
influence 0%

33. Cost 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.

34. Equity Method Investment in Brock Corp. Stock 350,000 Cash 350,000
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.

35. Sale 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.

36. Business 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.

37. Business Combinations
Mergers
Consolidations 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.

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

39. 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.
An example:
Market price per share $20.50 $13.50
Earnings per share $ $1.35
Price-earnings ratio
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.

40. Power Notes This is the last slide in Chapter 13. Chapter 13
Corporations: Income and Taxes,
Stockholders’ Equity, Investments in Stocks
This is the last slide in Chapter 13.
Note: To see the topic slide, type 2 and press Enter.