war22ech14income taxes unusual income items and investments stocks indonesia

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Adeng Pustikaningsih, M.Si.

Dosen Jurusan Pendidikan Akuntansi Fakultas Ekonomi

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2

Income Taxes,

Unusual Income

Items, and

Investments in Stocks

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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.

(4)

4

3.

Prepare an income statement

reporting earnings per share data.

4.

Describe the accounting for

investments in stocks.

(5)

Journalize the entries

for corporate income

taxes, including

deferred income taxes.

Objective 1

(6)

6 5

Corporate Income Taxes

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

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Agriculture 29%

Mining 33

Basic Industry 33

Miscellaneous Industry 28

Consumer Goods 31

Property 26

Infrastructure, Utility

and Transportation 27

Ratio of Reported Income Tax

Expense to Earnings Before Taxes for Selected Industries in Indonesia

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8

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.

(9)

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1.

Revenues or gains are taxed

after

they are reported in the

income statement.

14-1

Examples of Items That Create Temporary Differences

2.

Expenses or losses are deducted

in determining taxable income

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10

3.

Revenues or gains are taxed

before

they are reported on the

income statement.

14-1

4.

Expenses or losses are

deducted in determining

taxable income

before

they are

reported in the income

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Double Declining Balance Method (tax depreciation)

Straight-line (financial statement depreciation)

Total

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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.

(13)

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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

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14 13

If Rp48,000,000 of the deferred tax reverses and becomes due in the second

year, the entry will reflect this fact.

Deferred Income Tax Payable 48 000 000

Income Tax Payable 48 000 000

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Example Exercise 14-1

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For Practice: PE 14-1A, PE 14-1B

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

(17)

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 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.

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18

Describe and illustrate

the reporting of

unusual items on the

income statement.

Objective 2

(19)

14-2

Reporting Unusual Items on the Income Statement

Unusual items subtracted from gross

profit in determining income from

continuing operations are:

14-2

Fixed asset impairments

Restructuring charges

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20

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.

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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.

Examples of Events That Might Cause an Asset Impairment

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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.

14-2

Mar. 1 Loss on Fixed Asset Impairment 750 000 000

To record impairment of fixed assets due to plant closing.

(23)

Reporting of Unusual Items 14-2

on the Income Statement

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14-2

Unusual Items in the Income Statement

(25)

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Unusual items subtracted from gross

profit in determining income from

continuing operations are:

14-2

Fixed asset impairments

(26)

26

are costs

incurred with actions such as

canceling contracts, laying off or

relocating employees, and

combining operations.

14-2

(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

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28 27

14-2

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:

Mar. 1 Restructuring Charge 1,000 000 000

To record impairment of fixed assets due to plant closing.

Employee Termination

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14-2

Twenty five employees find

employment elsewhere and leave

the company on March 25.

Payment is made to these

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30 29

14-2

On March 25, the entry to record a severance payment of Rp125,000,000 to 25 of the terminated employees would be as follows:

Mar. 25 Employee Termination Obligation 125 000 000

To record payment to 25 employees as severance compensation.

(31)

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on the Income Statement

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14-2

31 Unusual Items in the

(33)

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

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For Practice: PE 14-2A, PE 14-2B

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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

(35)

Unusual items that may add or

subtract income from continuing

operations in determining net

income are:

14-2

Discontinued operations

Extraordinary items

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36

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

.

(37)

on the Income Statement

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14-2

(39)

14-2

Reporting Unusual Items on the Income Statement

Unusual items that adjust income

from continuing operations in

determining net income are:

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40

14-2

Extraordinary Items

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

(41)

14-2

Insert Exhibit 2 here also, p. 13 Reporting of Unusual Items _{on the Income Statement} 14-2

(42)

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42

14-2

(43)

14-2

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:

Retroactive Restatement

1. errors in the recognition, measurement, presentation, or disclosure of financial statements, and

2. changes from one generally accepted

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44

14-2 14-2

Reporting of Unusual Items on the Income Statement

Unusual items affecting prior period

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Prepare an income

statement

reporting earnings

per share data.

Objective 3

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14-3

Earnings per Common Share

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

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Earnings per

common share =

Net Income

Number of common shares outstanding If there is no preferred stock:

If there is preferred stock:

Earnings per

common share =

Net Income – Preferred stock dividends

Number of common shares outstanding

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48 47

14-3

(49)

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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.

Rp400 per share =

*2,000 shares x Rp100,000 par value x 9% = Rp18,000,000

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50

Describe the

accounting for

investments in

stocks.

Objective 4

(51)

14-5

Accounting for Investments in Stocks

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

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Trading securities are securities that

management intends to actively trade for profit.

14-5

Available-for-sale securities are

(53)

14-5

When a business invests in

available-for-sale securities,

such investments are classified

as

temporary investments

or

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14-5

Marketable securities must meet two conditions:

1. The securities must be readily marketable, and can be sold for cash at any time.

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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].

June 1 Marketable Securities 180 000 000

Purchased 2,000 shares of Inis Corporation common stock.

Cash 180 000 000

(56)

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56 63 Nov 30 Cash 1 800 000

Received dividends on Inis Corporation common stock (2,000 shares x Rp900).

Dividend Revenue 1 800 000

14-5

(57)

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.

14-5

(58)

58 65

Unrealized Common Stock Cost Market Gain (Loss)

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

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).

(59)

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_{Temporary Investments on} 14-5

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60

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

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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

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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

(63)

Account for the investment by using

the equity method

14-5

Accounting for Long-Term Stock Investments

Is there a significant influence over the investee?

No Yes

(64)

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64 71

14-5

Jan. 2 Investment in PT Berdikari Stock 350 000 000

Purchased 40% of PT Berdikari common stock.

Cash 350 000 000

On January 2, PT Hari Cerah pays cash of Rp350,000,000 for 30% of the common stock

(65)

14-5

Dec. 31 Investment in PT Berdikari Stock 42 000 000

Recorded 40% share of PT Berdikari. net income of Rp105,000,000.

Income of PT Berdikari. 42 000 000

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66 73

14-5 14-5

Dec. 31 Cash 18 000 000

Recorded 40% share of PT Berdikari dividends.

Investment in PT Berdikari Stock 18 000 000

(67)

14-5 14-5

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68 75

14-5 14-5

Mar. 1Cash 17 500 000

Investment in PT Doni Tata Stock 15 700 000 Gain on Sale of Investments 1 800 000

Sale of Investments in Stocks

On March 1, an investment in PT Doni Tata. stock that had a carrying amount of

(69)

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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

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For Practice: 14-6A, 14-6B

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

(71)

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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.

14-5 14-5

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72 79

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

(73)

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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.

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74 81

14-5

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.

An example: 2008 2007

Market price per share Rp2,460 Rp1,620 Earnings per share Rp1,640 Rp1,350