Accounting 21th waren reeve fess chapter 14

Chapter 14 Income Taxes, Unusual Income Tax Items, and Investments in Stocks Accounting, 21st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning All rights reserved Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc Some Some of of the the action action has has been been automated, automated, so so click click the the mouse mouse when when you you see see this this lightning lightningbolt bolt in in the the lower lower right-hand right-hand corner corner of of the the screen screen You You can can point point and and click click anywhere anywhere on on the the screen screen Objectives Objectives Journalize the entries for corporate income taxes, including After studying this Afterdeferred studyingincome this taxes Prepare anchapter, income statement reporting the you should chapter, you should following unusual items: fixed asset be able to: be able to: charges, impairments, restructuring discontinued operations, extraordinary items, and changes in accounting principles Prepare an income statement reporting earnings per share data Objectives Objectives Describe the concept and the reporting of comprehensive income Describe the accounting for investments in stocks Describe alternative methods of combining businesses and how consolidated financial statements are prepared Compute and interpret the priceearnings ratio Corporate Corporate Income Income Taxes Taxes Corporate Corporate Income Income Taxes Taxes A corporation that corporation four AAssume Assume corporation that amakes amakes corporation four income estimates tax its for income estimates tax installment installment its taxes taxespayments payments for the the throughout year $84,000 year throughout year to to be bethe the $84,000 year Corporate Corporate Income Income Taxes Taxes On On April April 15, 15, the the first first of of four four estimated estimated annual annual tax tax payments payments of of $21,000 $21,000 isis made made Apr 15 Income Tax Expense Cash To record quarterly payment of estimated income tax 21 000 00 21 000 00 Corporate Corporate Income Income Taxes Taxes Ratio of Reported Income Tax Expense to Earnings Before Taxes for Selected Industries Automobiles 33% Banking 35 Computers 35 Food 35 Integrated oil 39 Pharmaceutical 30 Retail 39 Telecommunication 17 Transportation 38 Allocating Allocating Income Income Taxes Taxes Revenues or gains are taxed after they are reported in the income statement Expenses or losses are deducted in determining taxable income after they are reported in the income statement Revenues or gains are taxed before they are reported on the income statement Expenses or losses are deducted in determining taxable income before they are reported in the income statement Temporary Differences  Differences in tax law and GAAP create some temporary differences that reverse in later years  Temporary differences not change or reduce the total amount of tax paid, they affect only the timing of when the taxes are paid Short-Term Short-Term Investments Investments in in Stocks Stocks Crabtree CrabtreeCo Co Statement Statementof ofComprehensive ComprehensiveIncome Income For Forthe theYear YearEnded EndedDecember December31, 31,2006 2006 Net Netincome income Other Othercomprehensive comprehensiveincome: income: Unrealized Unrealizedgain gainon ontemporary temporaryinvestments investments in inmarketable marketablesecurities securities(net (netof of applicable applicabletax taxof of$18,000) $18,000) Comprehensive Comprehensiveincome income $720,000 $720,000 42,000 42,000 $762,000 $762,000 Long-Term Long-Term Investments Investments in in Stocks Stocks Long-term Long-term investments investments are are those those investments investments made made by by aa firm firm that that are are not not intended intended as as aa source source of of cash cash in in the the normal normal operations operations of of the the business business Long-Term Long-Term Investments Investments in in Stocks Stocks Ownership % 100% Controlling Interest With With less lessthan than 20% 20% ownership ownership the the buyer buyer Equity 50% does not does not usually usually have have significant significant Method influence the Significant influence The The buyer buyer uses uses the cost cost method method to investment to account account for for the theinfluence investment Cost Method 20% 0% Not significant influence Long-Term Long-Term Investments Investments in in Stocks Stocks Ownership % 100% Equity Method Cost Method Ownership Ownership over over 20% 20% Controlling usually indicates usually indicates significant significant Interest influence The buyer uses influence The buyer uses 50% the the equity equity method method to to Significant account for account for the the investment investment influence 20% 0% No significant influence Long-Term Long-Term Investments Investments in in Stocks Stocks On On January January 2, 2, Hally Hally Inc Inc pays pays cash cash of of $350,000 $350,000 for for 40% 40% of of Brock Brock Corporation’s Corporation’s common common stock stock Jan Investment in Brock Corp Stock Cash Purchased 40% of Brock Corp common stock 350 000 00 350 000 00 Long-Term Long-Term Investments Investments in in Stocks Stocks For For the the year year ending ending December December 31, 31, Brock Brock Corporation Corporation reports reports net net income income of of $105,000 $105,000 Dec 31 Investment in Brock Corp Stock Income of Brock Corp Recorded share (40%) of Brock Corp net income of $105,000 42 000 00 42 000 00 Long-Term Long-Term Investments Investments in in Stocks Stocks On On December December 31, 31, Brock Brock Corporation Corporation declared declared aa $45,000 $45,000 dividend, dividend, payable payable on on December December 31 31 Dec 31 Cash 18 000 00 Investment in Brock Crop Stock Recorded share (40%) of dividends of $45,000 paid by Brock Corp 18 000 00 Long-Term Long-Term Investments Investments in in Stocks Stocks On On March March 1, 1, an an investment investment in in Drey Drey Inc Inc stock stock that that had had aa carrying carrying amount amount of of $15,700 $15,700 isis sold sold for for $17,500 $17,500 Mar Cash 17 500 00 Investment in Drey Inc Stock Gain on Sale of Investments Sold investment in Drey Inc stock 15 700 00 800 00 Business Business Combinations Combinations Ownership % 100% Equity Method Controlling Interest 50% Significant The The corporation corporation owning owning all all or or aa majority majority of of the the voting voting influence stock company The controlled stock isis called called the the parent parent company The controlled 20% corporation isisthe Consolidated corporationCost the subsidiary subsidiary company company Consolidated No significant financial are prepared which combines the financial statements statements are prepared which combines the Method influence operating of the two entities operating results results of the two entities 0% Business Business Combinations 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 Business Business Combinations Combinations Mergers A Consolidations 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 FINANCIAL ANALYSIS AND INTERPRETATION A A firm’s firm’s growth growth potential potential and and future future earnings earnings prospects prospects are are indicated indicated by by how how much much the the market market isis willing willing to to pay pay per per dollar dollar of of aa company’s company’s earnings earnings Accounting: Earnings Per Share Earnings per Net Income = Share of Common Common Shares Stock Investing: Price - Earnings Ratio Market Price Per Share Priceof Common Stock = Earnings Earnings Per Share of Ratio Common Stock 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 Earnings per share Price-earnings ratio 2006 $20.50 $1.64 12.5 2005 $13.50 $1.35 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 Chapter 14 The The End End ... After studying this Afterdeferred studyingincome this taxes Prepare anchapter, income statement reporting the you should chapter, you should following unusual items: fixed asset be able to: be... changes in accounting principles Prepare an income statement reporting earnings per share data Objectives Objectives Describe the concept and the reporting of comprehensive income Describe the accounting. .. 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