Summary
E. Consider the balance sheet account “Investment securities held to maturity”
82 ii. If the market value of securities held-to-maturity increased by $1 during
the reporting period, what journal entry would the company record?
There would be no journal entry because held-to-maturity securities are not adjusted to fair value and unrealized holding gains and losses are not recognized. Instead, these securities are amortized using the cost method throughout their lives.
83 ii. What is the market value of State Street’s investment securities held to
maturity?
The market value is $11,661,000,000.
iii. What is the amortized cost of these securities? What does “amortized cost” represent? How does amortized cost compare to the original cost of the securities?
The amortized cost is the $11,379,000,000 that is State Street’s year-end balance account. The amortized cost represents the acquisition cost adjusted for the amortization of the discount. The amortized cost is higher than the original cost because the balance on the books is increasing, therefore the securities were sold at a discount.
iv. What does the difference between the market value and the amortized cost represent? What does the difference suggest about how the average market rate of interest on held-to-maturity securities has changed since the purchase of the securities held by State Street?
The market rate is based on the current interest rates and the amortized cost is based on the purchase price adjusted for the amortization. The fair value of the securities is greater than the amortized cost which suggests that interest rates have decreased.
84 F. Consider the balance sheet account “Investment securities available for sale”
and the related disclosures in Note 4.
i. What is the 2012 year-end balance in this account? What does this balance represent?
The year-end balance is $109,682,000,000. This represent the current fair value of the investment securities available for sale.
ii. What is the amount of net unrealized gains or losses on the available-for- sale securities held by State Street at December 31, 2012? Be sure to note whether the amount is a net gain or loss.
The amount of net unrealized gains or losses is a $1,119,000,000 gain. This is calculated by subtracting the unrealized losses of $882,000,000 from the unrealized gains of $2,001,000,000.
iii. What was the amount of net realized gains (losses) from sales of available-for-sale securities for 2012? How would this amount impact State Street’s statements of income and cash flows for 2012?
The amount of net realized gains from sales of available-for-sale securities is
$55,000,000. This is calculated by subtracting the gross realized losses from sales of available-for-sale securities of $46,000,000 from the gross realized gain of $101,000,000. This gain would increase income and cash flows for 2012.
85 G. State Street’s statement of cash flow for 2012 (not included) shows the
following line items in the “Investing Activities” section relating to available- for-sale securities (in millions):
Proceeds from sales of available-for-sale securities: $5,399 Purchases of available-for-sale securities: $60,812
i. Show the journal entry State Street made to record the purchase of available-for-sale securities for 2012. (Journal entry numbers are in millions)
Investment in Available-for-sale 60,812
Cash 60,812
ii. Show the journal entry State Street made to record the sale of available- for-sale securities for 2012. Note 13 (not included) reports that the available-for-sale securities sold during 2012 had “unrealized pre-tax gains of $67 million as of December 31, 2011.” Hint: be sure to remove the current book-value of these securities in your entry. (All journal entries are in millions of dollars)
Cash 5,399
Unrealized Holding Gain 67
Investment in AFS securities 5,441
Realized Gain on AFS 55
iii. Use the information in part g. ii to determine the original cost of the available-for-sale securities sold during 2012.
Book value is equal to the cash proceeds minus any realized gain. The original cost would be $5,344,000,000.
86 ZAGG Inc.
Deferred Income Taxes
Case Problem 11
Madelyn Smith
4-11-2018
87
Summary
ZAGG Inc. designs protective, plastic shield for wristwatches and mobile device accessories. Similar to most other companies, ZAGG has a book income that is different from its taxable income. A company’s book income reflects the amount of revenues minus expenses the company has recognized during the current period according to GAAP’s regulations. The reason this is different from taxable income is that taxable income has to be prepared according to the restrictions of the Internal Revenue Services (IRS). Differences in timing are the main reason that book income and taxable income vary.
The timing differences in recognition of assets and liabilities result in the recording of deferred tax assets and deferred tax liabilities in order to attain the income expense reported for financial statements. If a company records a deferred tax asset then they will have a future deductible amount for their taxable income, but if a company has a deferred tax liability then they will have a future taxable amount for their income statement. If a company in not certain that it will be able to earn enough profits to benefit from the deferred tax assets, then they will need to create a valuation allowance account for the amount believed to be uncollectable. Timing differences are all temporary differences that will eventually be reversed. There are also permanent differences that lead to variances between the book income and taxable income, but these differences will never be reversed. Permanent differences can result from fines and other things that are considered expenses and subtracted out of book income but are never recognized by the IRS as deductions from taxable income.
88 A. Describe what is meant by the term book income? Which number in ZAGG’s
statement of operation captures this notion for fiscal 2012? Describe how a company’s book income differs from its taxable income.
Book income is the amount of income that is reported on the financial statements.
A company’s book income is their pre-tax financial income that is determined according to GAAP. A company’s taxable income is the amount of income that they will actually pay taxes on and it is determined by following the IRS’
standards. ZAGG’s book income for fiscal 2012 is $23,898,000 which is labeled as Income before provision before income taxes.