1 Adeng Pustikaningsih, M.Si. Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi Universitas Negeri Yogyakarta CP: 08 222 180 1695 Email : adengpustikaningsih@uny.ac.id 1
2 Income Taxes, 14 Unusual Income Items, and Investments in Stocks 2
3 After studying this chapter, you should be able to: 1. Journalize the entries for corporate income taxes, including deferred income taxes. 2. Describe and illustrate the reporting of unusual items on the income statement. 3
4 After studying this chapter, you should be able to: 3. Prepare an income statement reporting earnings per share data. 4. Describe the accounting for investments in stocks. 4
5 14-1 Objective 1 Journalize the entries for corporate income taxes, including deferred income taxes. 5
6 Corporate Income Taxes 14-1 Most corporations are required to pay estimated monthly income taxes in twelve installments throughout the year. A corporation estimates its income tax expense for the year to be Rp84,000,000. The first of twelve estimated payments is journalized as follows: Apr. 15 Income Tax Expense 7 000 000 Cash 7 000 000 56
7 Ratio of Reported Income Tax Expense to Earnings Before Taxes for Selected Industries in Indonesia Agriculture 29% Mining 33 Basic Industry 33 Miscellaneous Industry 28 Consumer Goods 31 Property 26 Infrastructure, Utility and Transportation 27 14-1 67
8 Allocating Income Taxes 14-1 Some differences between taxable income and income before income taxes are created because items are recognized in one period for tax purposes and in another period for income statement purposes. Such differences are call temporary differences because they reverse or turn around in later years. 8
9 Examples of Items That Create Temporary Differences 14-1 1. Revenues or gains are taxed after they are reported in the income statement. 2. Expenses or losses are deducted in determining taxable income after they are reported in the income statement. 9
10 14-1 3. Revenues or gains are taxed before they are reported on the income statement. 4. Expenses or losses are deducted in determining taxable income before they are reported in the income statement. 10
11 Exhibit 1 Temporary Differences 14-1 Double Declining Balance Method (tax depreciation) Straight-line (financial statement depreciation) Total Total depreciation is the same for tax and financial purposes. 11 10
12 14-1 At the end of the first year of operations, a corporation reports Rp300,000,000 of income before income taxes. With a 30% tax rate, the firm faces a tax of Rp90,000,000 (Rp300,000,000 x 30%). Using tax planning, the net income is reduced to Rp100,000,000 and the actual income tax due is Rp30,000,000 (Rp100,000,000 x 30%). The difference is deferred to future years. 12
13 14-1 The entry to record income taxes reflects the deferred amount of Rp60,000,000. Income Tax Expense 90 000 000 Income Tax Payable 30 000 000 Deferred Income Tax Payable 60 000 000 13 12
14 If Rp48,000,000 of the deferred tax reverses and becomes due in the second year, the entry will reflect this fact. 14-1 Deferred Income Tax Payable 48 000 000 Income Tax Payable 48 000 000 14 13
15 14-1 Example Exercise 14-1 A corporation has Rp200,000,000 of income before income taxes, a 30% tax rate, and Rp130,000,000 of taxable income. Provide the journal entry for the current year s taxes. 15 14
16 14-1 Follow My Example 14-1 Income Tax Expense 60,000,000 Income Tax Payable 39,000,000 Deferred Income Tax Payable 21,000,000 Income tax expense based on Rp200,000 reported income at 30% Rp60,000,000 Income tax payable based on Rp130,000,000 taxable income at 30% 39,000,000 Income tax deferred to future years Rp21,000,000 For Practice: PE 14-1A, PE 14-1B 16 15
17 Permanent Differences Differences between taxable income and income before taxes reported on the income statement may be the result of differences that are not timing differences. These are permanent differences that never reverse. 14-1 Interest income that is exempt on municipal bonds is an example of this type of a permanent difference. 17
18 14-2 Objective 2 Describe and illustrate the reporting of unusual items on the income statement. 18
19 Reporting Unusual Items on the Income Statement 14-2 Unusual items subtracted from gross profit in determining income from continuing operations are: Fixed asset impairments Restructuring charges 19
20 Fixed Asset Impairment 14-2 A fixed asset impairment occurs when the fair value of a fixed asset falls below its book value and is not expected to recover. 20
21 Examples of Events That Might Cause an Asset Impairment 14-2 1. Decrease in market price of fixed assets. 2. Significant changes in the business or regulations related to fixed assets. 3. Adverse conditions affecting the use of fixed assets. 4. Expected cash flow losses using fixed assets. 21
22 14-2 On March 1, PT Joko Jaya consolidates operations by closing a factory. As a result of the closing, plant and equipment is impaired by Rp750,000,000. Mar. 1 Loss on Fixed Asset Impairment 750 000 000 Equipment 750 000 000 To record impairment of fixed assets due to plant closing. 22 21
23 Reporting of Unusual Items on the Income Statement 14-2 Fixed asset impairments 23 22
24 Click to Unusual edit Items Master in the title style Income Statement 14-2 24 23
25 Reporting Unusual Items on the Income Statement 14-2 Unusual items subtracted from gross profit in determining income from continuing operations are: Fixed asset impairments Restructuring charges 25
26 Restructuring Charges 14-2 Restructuring charges are costs incurred with actions such as canceling contracts, laying off or relocating employees, and combining operations. 26
27 14-2 The management of PT Joko Jaya communicates a plan to terminate 200 employees from the closed manufacturing plant effective March 1. The restructuring plan calls for a termination benefit of Rp5,000,000 per employee. The employees have the right to work 60 days beyond March 1, but may elect to leave the firm earlier. 27
28 The fair value of this plan would be Rp1,000,000,000 (200 x Rp5,000,000), which is the aggregate expected cost of terminating the employees. The restructuring charge would be recorded as follows: 14-2 Mar. 1 Restructuring Charge 1,000 000 000 Employee Termination Obligation 1,000 000 000 To record impairment of fixed assets due to plant closing. 28 27
29 14-2 Twenty five employees find employment elsewhere and leave the company on March 25. Payment is made to these employees on that date. 29
30 On March 25, the entry to record a severance payment of Rp125,000,000 to 25 of the terminated employees would be as follows: 14-2 Mar. 25 Employee Termination Obligation 125 000 000 Cash 125 000 000 To record payment to 25 employees as severance compensation. 30 29
31 Reporting of Unusual Items on the Income Statement 14-2 Restructuring charges 31 30
32 Unusual Items in the Income Statement 14-2 32 31
33 14-2 Example Exercise 14-2 On December 20 of the current year. PT Toto Putra determined that equipment had been impaired so that the book value of the equipment was reduced by Rp180,000,000. In addition, the senior management of the company communicated an employee severance plan whereby 80 employees could receive a termination benefit of Rp7,000,000 per employee. Provide the journal entries for the asset impairment and the restructuring charge. 33 32
34 14-2 Follow My Example 14-2 Dec. 20 Loss on Fixed Asset Impairment 180,000,000 Equipment 180,000,000 20 Restructuring Charge 560,000,000* Employee Termination Obligation 560,000,000 *80 employees x Rp7,000,000 For Practice: PE 14-2A, PE 14-2B 34 33
35 Reporting Unusual Items on the Income Statement 14-2 Unusual items that may add or subtract income from continuing operations in determining net income are: Discontinued operations Extraordinary items 35
36 Discontinued Operations 14-2 A gain or loss from disposing of a business segment or component of an entity is reported on the income statement as a gain or loss from discontinued operations. 36
37 Reporting of Unusual Items on the Income Statement 14-2 Discontinued operations 37 36
38 Unusual Items in the Income Statement 14-2 38 37
39 Reporting Unusual Items on the Income Statement 14-2 Unusual items that adjust income from continuing operations in determining net income are: Discontinued operations Extraordinary items 39
40 Extraordinary Items 14-2 Extraordinary items result from events and transactions that (1) are significantly different (unusual) from the typical or the normal operating activities of the business, and (2) occur infrequently. 40
41 Reporting of Unusual Items on the Income Statement Click Insert to edit Exhibit Master 2 here also, title p. 13 style 14-2 Extraordinary items 41 40
42 Unusual Items in the Income Statement 14-2 42 41
43 Retroactive Restatement In addition to unusual items impacting the income statement, there are two major items that require a retroactive restatement of prior period earnings. These two items are: 1. errors in the recognition, measurement, presentation, or disclosure of financial statements, and 2. changes from one generally accepted accounting principle to another generally accepted accounting principle. 14-2 43
44 Reporting of Unusual Items on the Income Statement 14-2 Unusual items affecting prior period income statements 44 43
45 14-3 Objective 3 Prepare an income statement reporting earnings per share data. 45
46 Earnings per Common Share 14-3 The profitability of companies is often expressed as earnings per share. Earnings per common share (EPS), sometimes called basic earnings per share, is the net income per share of common stock outstanding during a period. 46
47 If there is no preferred stock: Earnings per common share = Net Income Number of common shares outstanding 14-3 If there is preferred stock: Earnings per common share = Net Income Preferred stock dividends Number of common shares outstanding 47 46
48 Click to Income edit Statement Master with title style Earnings per Share 14-3 48 47
49 Example Exercise 14-3 PT Montana Karya had net income of Rp250,000,000 during the year. There were 580,000 common shares outstanding during the year. There were 2,000 shares of Rp100,000 par value, 9% preferred stock outstanding during the year. Determine the basic earnings per share. Follow My Example 14-3 14-3 Earnings per share: Rp250,000,000 Rp18,000,000* 580,000 *2,000 shares x Rp100,000 par value x 9% = Rp18,000,000 For Practice: PE 14-3A, PE 14-3B = Rp400 per share 49 48
50 14-5 Objective 4 Describe the accounting for investments in stocks. 50
51 Accounting for Investments in Stocks 14-5 Like individuals, businesses have a variety of reasons for investing in stocks, called equity securities. A business may purchase stocks as a means of earning a return on excess cash that it does not need for its normal operations. 51
52 14-5 Trading securities are securities that management intends to actively trade for profit. Available-for-sale securities are securities that management expects to sell in the future, but which are not actively traded for profit. 52
53 14-5 When a business invests in available-for-sale securities, such investments are classified as temporary investments or marketable securities. 53
54 14-5 Marketable securities must meet two conditions: 1. The securities must be readily marketable, and can be sold for cash at any time. 2. Management must intend to sell the securities when the business needs cash for operations. 54
55 On June 1, Kepiting Nusantara purchased 2,000 shares of PT Inez common stock at Rp89,750 per share plus a brokerage fee of Rp500,000. The firm paid Rp180,000,000 [(Rp89,750 x 2,000 shares) + Rp500,000]. 14-5 June 1 Marketable Securities 180 000 000 Cash 180 000 000 Purchased 2,000 shares of Inis Corporation common stock. 55 62
56 14-5 On October 1, PT Inez declared a Rp900 per share dividend payable on November 30. Nov 30 Cash 1 800 000 Dividend Revenue 1 800 000 Received dividends on Inis Corporation common stock (2,000 shares x Rp900). 56 63
57 Unrealized Holdings Gain or Loss 14-5 On the balance sheet, temporary investments are reported at their fair market value. Any difference between the fair market value and their cost is an unrealized holding gain or loss. 57
58 PT Kepiting Nusantara. s portfolio of temporary investments was purchased during 2008 and has the following fair market values and unrealized gains and losses on December 31, 2008 (in 000 Rp). Unrealized Common Stock Cost Market Gain (Loss) 14-5 PT Udang Nusa Rp150,000 $190,000 Rp40,000 PT Gurita Abadi 200,000 200,000 PT Penyu Ria 180,000 210,000 30,000 PT Pesut Putra 160,000 150,000 (10,000) Total Rp690,000 Rp750,000 Rp60,000 58 65
59 Click to Temporary edit Investments Master on title style the Balance Sheet 14-5 59 66
60 14-5 Example Exercise 14-5 PT Dimori began operations on January 1, 2008 and purchased temporary investments in marketable securities during the year at a cost of Rp75,000,000. The end-of-period market value for these investments was Rp110,000,000. Net income was Rp180,000,000 for 2008. Determine (a) the reported amount of marketable securities on the December 31, 2008 balance sheet, and (b) the comprehensive income for 2008. Assume a tax rate of 30%. 60 67
61 14-5 Follow My Example 14-5 a. Initial costs Rp 75,000,000 Unrealized gain (Rp110,000,000 Rp75,000,000) Rp35,000,000 Less: Tax on unrealized gain (Rp35,000,000 x 30%) 10,500,000 Unrealized gain, net of tax 24,500,000 Reported amount of marketable securities Rp 99,500,000 b. Net income Rp180,000,000 Unrealized gain (Rp110,000,000 Rp75,000,000) Rp35,000,000 Less: Tax on unrealized gain (Rp35,000,000 x 30%) 10,500,000 Other comprehensive income, net of tax 24,500,000 Net income Rp204,500,000 For Practice: 14-5A, 14-5B 61 68
62 Long-Term Investments in Stocks Long-term investments are not intended as a source of cash in the normal operations of the business. Rather, such investments are often held for their income, long-term gain potential, or influence over another business entity. 14-5 62
63 Accounting for Long-Term Stock Investments 14-5 Is there a significant influence over the investee? No Yes Account for the investment as an available-for-sale Account for the investment by using the equity method security 63 70
64 14-5 On January 2, PT Hari Cerah pays cash of Rp350,000,000 for 30% of the common stock and net assets of PT Berdikari Jan. 2 Investment in PT Berdikari Stock 350 000 000 Cash 350 000 000 Purchased 40% of PT Berdikari common stock. 64 71
65 14-5 For the year ending December 31, PT Berdikari reports net income of Rp105,000,000. Dec. 31 Investment in PT Berdikari Stock 42 000 000 Income of PT Berdikari. 42 000 000 Recorded 40% share of PT Berdikari. net income of Rp105,000,000. 65 72
66 14-5 On December 31, PT Berdikari pays Rp45,000,000 in dividends. Dec. 31 Cash 18 000 000 Investment in PT Berdikari Stock 18 000 000 Recorded 40% share of PT Berdikari dividends. 66 73
67 Investments and Dividends 14-5 67 74
68 Sale of Investments in Stocks 14-5 On March 1, an investment in PT Doni Tata. stock that had a carrying amount of Rp15,700,000 is sold for Rp17,500,000. Mar. 1Cash 17 500 000 Investment in PT Doni Tata Stock 15 700 000 Gain on Sale of Investments 1 800 000 68 75
69 14-5 Example Exercise 14-6 PT Parkit purchased 30% of the outstanding stock of PT Sonya on January 1, 2008. PT Sonya reported net income of Rp90,000,000 and declared dividends of Rp15,000,000 during 2008. How much would PT Parkit adjust their investment in PT Sonya under the equity method? 69 76
70 14-5 Follow My Example 14-6 Parkit share of Sonya reported net income (30% x Rp90,000,000) Rp27,000,000 Less: Parkit share of the Sonya dividend (30% x Rp15,000,000) 4,500,000 Increase in Investment in Sonya Company Stock Rp22,500,000 For Practice: 14-6A, 14-6B 70 77
71 Financial Analysis and Interpretation 14-5 A firm s growth potential and future earnings prospects are indicated by how much the market is willing to pay per dollar of a company s earnings. This ratio, called the price-earnings ratio, or P/E ratio, is commonly included in stock market quotations. 71
72 14-5 Earnings Per Share Net Income Common Shares = Earnings per Share of Common Stock Price - Earnings Ratio Market Price Per Share of Common Stock Earnings Per Share of Common Stock = Price- Earnings Ratio 72 79
73 14-5 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. 73
74 14-5 An example: 2008 2007 Market price per share Rp2,460 Rp1,620 Earnings per share Rp1,640 Rp1,350 Price-earnings ratio 15.0 12.0 The price-earnings ratio indicates that a share of common stock was selling for 12 times the amount of earnings per share at the end of 2007 and 15 times earnings per share at the end of 2008. 74 81