Chapter 13
Corporations: Income and Taxes,
Stockholders’ Equity and Investments in
Stocks
C13 - 1
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
C13 - 2
Corporate Income Taxes

Corporations are taxable entities that must pay
income taxes.

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.
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Temporary Differences in Reporting Revenues
Revenue
Reporting
Financial
Reporting
Report Now
Example: Income
reporting methods.
Example: Cash
collected in advance.
Point-of-Sale
Method
Tax
Reporting
Taxable Later
Installment
Method
Report Later
Taxable Now
When
Earned
When
Collected
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Temporary Differences in Reporting Expenses
Expense
Deductions
Example: Product
warranty expense.
Example: Methods
of depreciation.
Financial
Reporting
Tax
Reporting
Deduct Now
Deduct Later
When
Estimated
When
Paid
Deduct Slower
Deduct Faster
Straight-Line
Method
MACRS
Method
C13 - 5
(p.512-513)
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
1st Yr.
Debit
Credit
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
Income Tax Payable
48,000
48,000
Record $48,000 of deferred tax as payable.
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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
1st Yr.
Description
Debit
Credit
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.
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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
1st Yr.
Description
Debit
Credit
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.
C13 - 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
1st Yr.
Description
Debit
Credit
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.
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More example p.534 Ex.13-1
April
15
Income Tax Expense
80,000
Cash
80,000
June
15
Income Tax Expense
80,000
Cash
80,000
Sept.
15
Income Tax Expense
80,000
Cash
80,000
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More example p.534 Ex.13-1
Dec.31 Income Tax Expense
Income Tax Payable
Deferred Income Tax Payable
240,000*
100,000**
140,000
*[($1,200,000 × 40%) – (3 × $80,000)] = $240,000
**[($850,000 × 40%) – (3 × $80,000)] = $100,000
Jan.
15
Income Tax Payable
Cash
100,000
100,000
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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.
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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
150,000
Cumulative effect on prior years of changing to
different depreciation method (Note B)
92,000
Net income
$832,000
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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
150,000
Cumulative effect on prior years of changing to
different depreciation method (Note B)
92,000
Net income
$832,000
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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
150,000
Cumulative effect on prior years of changing to
different depreciation method (Note B)
92,000
Net income
$832,000
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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
150,000
Cumulative effect on prior years of changing to
different depreciation method (Note B)
92,000
Net income
$832,000
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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.
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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
Number of common shares outstanding: 200,000
C13 - 18
(p.517)
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
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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
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Reporting Retained Earnings
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30, 2003
Retained earnings, July 1, 2002
Net income
Less dividends declared
Increase in retained earnings
Retained earnings, June 30, 2003
$350,000
$280,000
75,000
205,000
$555,000
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Analyzing Stock Investments
Accounting: Earnings Per Share
Net Income
Common Shares
=
Earnings
Per Share
Investing: Price - Earnings Ratio
PriceMarket Price Per Share
= Earnings
Earnings Per Share
Ratio
C13 - 22
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
Earnings per share
Price-earnings ratio
2003
$20.50
$1.64
12.5
2002
$13.50
$1.35
10.0
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.
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HOME WORK
READING:
1. Illustrative problem
2. Self- examination questions
3. Multiple choice
Writing:
1. Exercise: 13-9, 13-10
2. Problem :
Discussion:
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The end of Chapter 13
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