C12 - 1
Learning Objectives
Power Notes
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
Chapter F12
C12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
C12 - 2
Corporate Income Taxes
Unusual Income Statement Items
Earnings Per Common Share
Reporting Stockholders’ Equity
Long-Term Stock Investments
Business Combinations
Price-Earnings Ratio
Slide # Power Note Topics
3
10
16
22
28
36
38
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
C12 - 3
Corporate Income Taxes
Corporations are taxable entities that must pay
income taxes.
Because income tax is often a significant
amount,it is reported as a special deduction.
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.
C12 - 4
Temporary Differences in Reporting Revenues
Report Now Taxable Later
Report Later Taxable Now
Example,Income
reporting methods,
Point-of-Sale
Method
Installment
Method
Financial
Reporting
Tax
Reporting
Example,Cash
collected in advance.
When
Earned
When
Collected
Revenue
Reporting
C12 - 5
Temporary Differences in Reporting Expenses
Deduct Now Deduct Later
Deduct Slower Deduct Faster
Example,Product
warranty expense,
When
Estimated
When
Paid
Financial
Reporting
Tax
Reporting
Example,Methods
of depreciation.
Straight-Line
Method
MACRS
Method
Expense
Deductions
C12 - 6
Date Description Debit Credit
Income Tax Accounting
Income Tax Expense 120,000
Income Tax Payable 40,000
Deferred Income Tax Payable 80,000
Deferred Income Tax Payable 48,000
Income Tax Payable 48,000
1st Yr.
Income tax allocation due to timing differences.
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
Record $48,000 of deferred tax as payable.
2nd Yr.
C12 - 7
Date Description Debit Credit
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
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.
1st Yr.
C12 - 8
Date Description Debit Credit
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
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.
1st Yr.
C12 - 9
Date Description Debit Credit
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
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.
1st Yr.
C12 - 10
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.
C12 - 11
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
C12 - 12
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
C12 - 13
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
Differences created by unusual items,
discontinued operations,extraordinary
items,and change in methods.
C12 - 14
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
C12 - 15
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
C12 - 16
Reporting Earnings Per Common Share
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.
Earnings per share (EPS) is the net income per
share of common stock outstanding,When
unusual items exist,EPS should be reported for:
C12 - 17
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
C12 - 18
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
C12 - 19
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
C12 - 20
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
C12 - 21
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
C12 - 22
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
Stockholders’ Equity
C12 - 23
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
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
Shareholders’ Equity
C12 - 24
Stockholders’ Equity
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
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
C12 - 25
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 26
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 27
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 28
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
C12 - 29
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%With less than 20% ownership the buyer does not usually have significant influence,
The buyer uses the cost method to account
for the investment.
C12 - 30
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
Ownership over 20%
usually indicates
significant influence.
The buyer uses the
equity method to
account for the
investment.
C12 - 31
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
The corporation owning all or a majority of the
voting stock is called the parent company,
The controlled corporation is the subsidiary
company,Consolidated financial statements
are prepared which combinine the operating
results of the two entities.
C12 - 32
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
C12 - 33
Date Description Debit Credit
Cost Method
Investment in Stock 5,940
Cash 5,940
Cash 200
Dividend Revenue 200
Mar,1
Purchased 100 shares of Compton Corp,
stock at 59 plus brokerage fee of $40.
Received $2 cash dividend from Compton Corp.
Dec,31
The cost method is used when the buyer does
not have significant influence over the operating
and financing activities of the investee.
C12 - 34
Date Description Debit Credit
Equity Method
Investment in Brock Corp,Stock 350,000
Cash 350,000
Investment in Brock Corp,Stock 42,000
Income of Brock Corp,42,000
Cash 18,000
Investment in Brock Corp,Stock 18,000
Jan,2
Purchased 40% of Brock Corporation for $350,000.
Brock Corporation reports net income of $105,000.
Dec,31
Brock Corporation reports total dividends of $45,000.
Dec,31
C12 - 35
Date Description Debit Credit
Sale of Long-Term Stock Investment
Cash 17,500
Investment in Stock 15,700
Gain on Sale of Investments 1,800
Mar,1
Sold stock of Drey Inc,for $17,500.
Stock has a carrying value of $15,700.
When shares of stock are sold,the investment
account is credited for the carrying value (book
value) of the shares sold.
C12 - 36
Business Combinations
Many businesses combine in order to produce
more efficiently or to diversify product lines.
A merger combines two corporations by one
acquiring the properties of another that is then
dissolved.
A consolidation is the creation of a new
corporation,to which the combined assets and
liabilities of the old corporations are transferred.
C12 - 37
Business Combinations
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.
Mergers
A
B
Consolidations
C
A
B
C12 - 38
Analyzing Stock Investments
Accounting,Earnings Per Share
Net Income
Common Shares
Investing,Price - Earnings Ratio
Market Price Per Share
Earnings Per Share
Earnings
Per Share=
Price-
Earnings
Ratio
=
C12 - 39
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,
The price-earnings ratio indicates that a share of
common stock was selling for 10 times earnings for
1999 and 12.5 times for 2000.
An example,2000 1999
Market price per share $20.50 $13.50
Earnings per share $1.64 $1.35
Price-earnings ratio 12.5 10.0
C12 - 40
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F12,
Power NotesChapter F12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
Learning Objectives
Power Notes
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
Chapter F12
C12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
C12 - 2
Corporate Income Taxes
Unusual Income Statement Items
Earnings Per Common Share
Reporting Stockholders’ Equity
Long-Term Stock Investments
Business Combinations
Price-Earnings Ratio
Slide # Power Note Topics
3
10
16
22
28
36
38
Note,To select a topic,type the slide # and press Enter.
Power NotesChapter F12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
C12 - 3
Corporate Income Taxes
Corporations are taxable entities that must pay
income taxes.
Because income tax is often a significant
amount,it is reported as a special deduction.
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.
C12 - 4
Temporary Differences in Reporting Revenues
Report Now Taxable Later
Report Later Taxable Now
Example,Income
reporting methods,
Point-of-Sale
Method
Installment
Method
Financial
Reporting
Tax
Reporting
Example,Cash
collected in advance.
When
Earned
When
Collected
Revenue
Reporting
C12 - 5
Temporary Differences in Reporting Expenses
Deduct Now Deduct Later
Deduct Slower Deduct Faster
Example,Product
warranty expense,
When
Estimated
When
Paid
Financial
Reporting
Tax
Reporting
Example,Methods
of depreciation.
Straight-Line
Method
MACRS
Method
Expense
Deductions
C12 - 6
Date Description Debit Credit
Income Tax Accounting
Income Tax Expense 120,000
Income Tax Payable 40,000
Deferred Income Tax Payable 80,000
Deferred Income Tax Payable 48,000
Income Tax Payable 48,000
1st Yr.
Income tax allocation due to timing differences.
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
Record $48,000 of deferred tax as payable.
2nd Yr.
C12 - 7
Date Description Debit Credit
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
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.
1st Yr.
C12 - 8
Date Description Debit Credit
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
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.
1st Yr.
C12 - 9
Date Description Debit Credit
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
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.
1st Yr.
C12 - 10
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.
C12 - 11
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
C12 - 12
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
C12 - 13
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
Differences created by unusual items,
discontinued operations,extraordinary
items,and change in methods.
C12 - 14
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
C12 - 15
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
C12 - 16
Reporting Earnings Per Common Share
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.
Earnings per share (EPS) is the net income per
share of common stock outstanding,When
unusual items exist,EPS should be reported for:
C12 - 17
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
C12 - 18
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
C12 - 19
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
C12 - 20
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
C12 - 21
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
C12 - 22
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
Stockholders’ Equity
C12 - 23
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
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
Shareholders’ Equity
C12 - 24
Stockholders’ Equity
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
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
C12 - 25
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 26
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 27
Adang Corporation
Retained Earnings Statement
For the Year Ended June 30,2003
Reporting Retained Earnings
Retained earnings,July 1,2002 $350,000
Net income $280,000
Less dividends declared 75,000
Increase in retained earnings 205,000
Retained earnings,June 30,2003 $555,000
C12 - 28
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
C12 - 29
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%With less than 20% ownership the buyer does not usually have significant influence,
The buyer uses the cost method to account
for the investment.
C12 - 30
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
Ownership over 20%
usually indicates
significant influence.
The buyer uses the
equity method to
account for the
investment.
C12 - 31
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
The corporation owning all or a majority of the
voting stock is called the parent company,
The controlled corporation is the subsidiary
company,Consolidated financial statements
are prepared which combinine the operating
results of the two entities.
C12 - 32
Long-Term Stock Investments
Equity
Method
Cost
Method
Not significant
influence
Significant
influence
Ownership %
Controlling
Interest
100%
20%
0%
50%
C12 - 33
Date Description Debit Credit
Cost Method
Investment in Stock 5,940
Cash 5,940
Cash 200
Dividend Revenue 200
Mar,1
Purchased 100 shares of Compton Corp,
stock at 59 plus brokerage fee of $40.
Received $2 cash dividend from Compton Corp.
Dec,31
The cost method is used when the buyer does
not have significant influence over the operating
and financing activities of the investee.
C12 - 34
Date Description Debit Credit
Equity Method
Investment in Brock Corp,Stock 350,000
Cash 350,000
Investment in Brock Corp,Stock 42,000
Income of Brock Corp,42,000
Cash 18,000
Investment in Brock Corp,Stock 18,000
Jan,2
Purchased 40% of Brock Corporation for $350,000.
Brock Corporation reports net income of $105,000.
Dec,31
Brock Corporation reports total dividends of $45,000.
Dec,31
C12 - 35
Date Description Debit Credit
Sale of Long-Term Stock Investment
Cash 17,500
Investment in Stock 15,700
Gain on Sale of Investments 1,800
Mar,1
Sold stock of Drey Inc,for $17,500.
Stock has a carrying value of $15,700.
When shares of stock are sold,the investment
account is credited for the carrying value (book
value) of the shares sold.
C12 - 36
Business Combinations
Many businesses combine in order to produce
more efficiently or to diversify product lines.
A merger combines two corporations by one
acquiring the properties of another that is then
dissolved.
A consolidation is the creation of a new
corporation,to which the combined assets and
liabilities of the old corporations are transferred.
C12 - 37
Business Combinations
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.
Mergers
A
B
Consolidations
C
A
B
C12 - 38
Analyzing Stock Investments
Accounting,Earnings Per Share
Net Income
Common Shares
Investing,Price - Earnings Ratio
Market Price Per Share
Earnings Per Share
Earnings
Per Share=
Price-
Earnings
Ratio
=
C12 - 39
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,
The price-earnings ratio indicates that a share of
common stock was selling for 10 times earnings for
1999 and 12.5 times for 2000.
An example,2000 1999
Market price per share $20.50 $13.50
Earnings per share $1.64 $1.35
Price-earnings ratio 12.5 10.0
C12 - 40
Note,To see the topic slide,type 2 and press Enter.
This is the last slide in Chapter F12,
Power NotesChapter F12
Corporations,Income and Taxes,
Stockholders’ Equity,Investments in Stocks
