war22ech14income taxes unusual income items and investments stocks indonesia
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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
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Income Taxes,
Unusual Income
Items, and
Investments in Stocks
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3
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to
edit
Master
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style
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
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to
edit
Master
title
style
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.
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5
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Objective 1
14-1
Journalize the entries
for corporate income
taxes, including
deferred income taxes.
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Corporate Income Taxes
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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
Cash
7 000 000
7 000 000
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Ratio of Reported Income Tax
Expense to Earnings Before Taxes
for Selected Industries in Indonesia
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Agriculture
Mining
Basic Industry
Miscellaneous Industry
Consumer Goods
Property
Infrastructure, Utility
and Transportation
14-1
29%
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28
31
26
27
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Allocating Income Taxes
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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.
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Examples of Items That Create
Temporary Differences
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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.
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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.
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Exhibit 1 Temporary Differences
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14-1
Double Declining Balance
Method (tax depreciation)
Straight-line (financial
statement depreciation)
Total
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Total depreciation is the same for tax and financial purposes.
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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.
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14-1
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The entry to record income taxes reflects the
deferred amount of Rp60,000,000.
Income Tax Expense
Income Tax Payable
Deferred Income Tax Payable
90 000 000
30 000 000
60 000 000
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14-1
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
Income Tax Payable
48 000 000
48 000 000
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14-1
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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.
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14-1
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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
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Permanent Differences
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14-1
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.
Interest income that is exempt on
municipal bonds is an example of this
type of a permanent difference.
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Objective 2
14-2
Describe and illustrate
the reporting of
unusual items on the
income statement.
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items subtracted from gross
profit in determining income from
continuing operations are:
Fixed asset impairments
Restructuring charges
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Fixed Asset Impairment
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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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Examples of Events That Might
Cause an Asset Impairment
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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.
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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
Equipment
To record impairment of
750 000 000
750 000 000
fixed assets due to plant
closing.
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Reporting of Unusual Items
on the Income Statement
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14-2
Fixed asset
impairments
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Unusual Items in the
Income Statement
14-2
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items subtracted from gross
profit in determining income from
continuing operations are:
Fixed asset impairments
Restructuring charges
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Restructuring Charges
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14-2
Restructuring charges are costs
incurred with actions such as
canceling contracts, laying off or
relocating employees, and
combining operations.
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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.
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14-2
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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
Employee Termination
Obligation
1,000 000 000
1,000 000 000
To record impairment of
fixed assets due to plant
closing.
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14-2
Twenty five employees find
employment elsewhere and leave
the company on March 25.
Payment is made to these
employees on that date.
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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
Cash
To record payment to 25
125 000 000
125 000 000
employees as severance
compensation.
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Reporting of Unusual Items
on the Income Statement
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14-2
Restructuring
charges
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Unusual Items in the
Income Statement
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14-2
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14-2
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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.
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14-2
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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
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items that may add or
subtract income from continuing
operations in determining net
income are:
Discontinued operations
Extraordinary items
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Discontinued Operations
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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.
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Reporting of Unusual Items
on the Income Statement
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14-2
Discontinued
operations
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Unusual Items in the
Income Statement
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14-2
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items that adjust income
from continuing operations in
determining net income are:
Discontinued operations
Extraordinary items
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Extraordinary Items
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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.
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Reporting of Unusual Items
Insert
Exhibit
here also,
on the
Income 2
Statement
p. 13 style
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14-2
Extraordinary
items
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Unusual Items in the
Income Statement
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14-2
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Retroactive Restatement
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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:
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.
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Reporting of Unusual Items
on the Income Statement
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Unusual items affecting prior period
income statements
14-2
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Objective 3
14-3
Prepare an income
statement
reporting earnings
per share data.
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Earnings per Common Share
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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.
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14-3
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If there is no preferred stock:
Net Income
Earnings per
=
common share
Number of common shares outstanding
If there is preferred stock:
Net Income – Preferred stock dividends
Earnings per
=
common share
Number of common shares outstanding
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Income Statement with
Earnings per Share
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14-3
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14-3
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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
Earnings per share: Rp250,000,000 – Rp18,000,000* Rp400 per
= share
580,000
*2,000 shares x Rp100,000 par value x 9% = Rp18,000,000
For Practice: PE 14-3A, PE 14-3B
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Objective 4
14-5
Describe the
accounting for
investments in
stocks.
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Accounting for Investments in Stocks
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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.
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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.
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14-5
When a business invests in
available-for-sale securities,
such investments are classified
as temporary investments or
marketable securities.
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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.
2. Management must intend to sell the
securities when the business needs
cash for operations.
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14-5
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
Cash
Purchased 2,000 shares of Inis
Corporation common stock.
180 000 000
180 000 000
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14-5
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On October 1, PT Inez declared a Rp900 per share
dividend payable on November 30.
Nov 30 Cash
Dividend Revenue
1 800 000
1 800 000
Received dividends on Inis
Corporation common stock
(2,000 shares x Rp900).
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Unrealized Holdings Gain or Loss
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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.
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14-5
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)
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
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Temporary Investments on
the Balance Sheet
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14-5
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14-5
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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%.
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14-5
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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
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Long-Term Investments in Stocks
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14-5
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.
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Accounting for Long-Term Stock
Investments
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14-5
Is there a significant influence
over the investee?
No
Yes
Account for the
investment as an
available-for-sale
security
Account for the
investment by using
the equity method
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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
Cash
Purchased 40% of PT
Berdikari common stock.
350 000 000
350 000 000
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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.
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14-5
On December 31, PT Berdikari pays
Rp45,000,000 in dividends.
Dec. 31 Cash
Investment in PT Berdikari Stock
Recorded 40% share of PT
Berdikari dividends.
18 000 000
18 000 000
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Investments and Dividends
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14-5
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Sale of Investments in Stocks
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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
Investment in PT Doni Tata Stock
Gain on Sale of Investments
17 500 000
15 700 000
1 800 000
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14-5
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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?
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14-5
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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
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Financial Analysis and Interpretation
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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.
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14-5
Earnings Per Share
Earnings per
Net Income
= Share of Common
Common Shares
Stock
Price - Earnings Ratio
Market Price Per Share
Priceof Common Stock
= Earnings
Earnings Per Share of
Ratio
Common Stock
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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.
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An example:
Market price per share
Earnings per share
Price-earnings ratio
2008
Rp2,460
Rp1,640
15.0
14-5
2007
Rp1,620
Rp1,350
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.
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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
Click to edit Master title style 14
Income Taxes,
Unusual Income
Items, and
Investments in Stocks
2
3
Click
to
edit
Master
title
style
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
Click
to
edit
Master
title
style
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
Click to edit Master title style
Objective 1
14-1
Journalize the entries
for corporate income
taxes, including
deferred income taxes.
5
6
Corporate Income Taxes
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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
Cash
7 000 000
7 000 000
56
7
Ratio of Reported Income Tax
Expense to Earnings Before Taxes
for Selected Industries in Indonesia
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Agriculture
Mining
Basic Industry
Miscellaneous Industry
Consumer Goods
Property
Infrastructure, Utility
and Transportation
14-1
29%
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28
31
26
27
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8
Allocating Income Taxes
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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
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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.
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10
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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.
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Exhibit 1 Temporary Differences
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14-1
Double Declining Balance
Method (tax depreciation)
Straight-line (financial
statement depreciation)
Total
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10
Total depreciation is the same for tax and financial purposes.
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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.
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13
14-1
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The entry to record income taxes reflects the
deferred amount of Rp60,000,000.
Income Tax Expense
Income Tax Payable
Deferred Income Tax Payable
90 000 000
30 000 000
60 000 000
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14-1
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
Income Tax Payable
48 000 000
48 000 000
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14-1
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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.
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14-1
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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
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Permanent Differences
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14-1
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.
Interest income that is exempt on
municipal bonds is an example of this
type of a permanent difference.
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18
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Objective 2
14-2
Describe and illustrate
the reporting of
unusual items on the
income statement.
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19
Reporting Unusual Items on the
Income Statement
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14-2
Unusual items subtracted from gross
profit in determining income from
continuing operations are:
Fixed asset impairments
Restructuring charges
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20
Fixed Asset Impairment
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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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Examples of Events That Might
Cause an Asset Impairment
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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.
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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
Equipment
To record impairment of
750 000 000
750 000 000
fixed assets due to plant
closing.
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Reporting of Unusual Items
on the Income Statement
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14-2
Fixed asset
impairments
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Unusual Items in the
Income Statement
14-2
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items subtracted from gross
profit in determining income from
continuing operations are:
Fixed asset impairments
Restructuring charges
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Restructuring Charges
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14-2
Restructuring charges are costs
incurred with actions such as
canceling contracts, laying off or
relocating employees, and
combining operations.
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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.
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14-2
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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
Employee Termination
Obligation
1,000 000 000
1,000 000 000
To record impairment of
fixed assets due to plant
closing.
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14-2
Twenty five employees find
employment elsewhere and leave
the company on March 25.
Payment is made to these
employees on that date.
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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
Cash
To record payment to 25
125 000 000
125 000 000
employees as severance
compensation.
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Reporting of Unusual Items
on the Income Statement
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14-2
Restructuring
charges
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Unusual Items in the
Income Statement
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14-2
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14-2
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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.
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14-2
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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
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items that may add or
subtract income from continuing
operations in determining net
income are:
Discontinued operations
Extraordinary items
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Discontinued Operations
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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.
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Reporting of Unusual Items
on the Income Statement
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14-2
Discontinued
operations
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Unusual Items in the
Income Statement
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14-2
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Reporting Unusual Items on the
Income Statement
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14-2
Unusual items that adjust income
from continuing operations in
determining net income are:
Discontinued operations
Extraordinary items
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Extraordinary Items
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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.
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Reporting of Unusual Items
Insert
Exhibit
here also,
on the
Income 2
Statement
p. 13 style
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14-2
Extraordinary
items
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Unusual Items in the
Income Statement
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14-2
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Retroactive Restatement
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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:
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.
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Reporting of Unusual Items
on the Income Statement
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Unusual items affecting prior period
income statements
14-2
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Objective 3
14-3
Prepare an income
statement
reporting earnings
per share data.
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Earnings per Common Share
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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.
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14-3
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If there is no preferred stock:
Net Income
Earnings per
=
common share
Number of common shares outstanding
If there is preferred stock:
Net Income – Preferred stock dividends
Earnings per
=
common share
Number of common shares outstanding
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Income Statement with
Earnings per Share
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14-3
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14-3
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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
Earnings per share: Rp250,000,000 – Rp18,000,000* Rp400 per
= share
580,000
*2,000 shares x Rp100,000 par value x 9% = Rp18,000,000
For Practice: PE 14-3A, PE 14-3B
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Objective 4
14-5
Describe the
accounting for
investments in
stocks.
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Accounting for Investments in Stocks
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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.
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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.
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14-5
When a business invests in
available-for-sale securities,
such investments are classified
as temporary investments or
marketable securities.
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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.
2. Management must intend to sell the
securities when the business needs
cash for operations.
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14-5
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
Cash
Purchased 2,000 shares of Inis
Corporation common stock.
180 000 000
180 000 000
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14-5
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On October 1, PT Inez declared a Rp900 per share
dividend payable on November 30.
Nov 30 Cash
Dividend Revenue
1 800 000
1 800 000
Received dividends on Inis
Corporation common stock
(2,000 shares x Rp900).
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Unrealized Holdings Gain or Loss
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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.
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14-5
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)
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
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Temporary Investments on
the Balance Sheet
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14-5
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14-5
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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%.
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14-5
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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
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Long-Term Investments in Stocks
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14-5
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.
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Accounting for Long-Term Stock
Investments
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14-5
Is there a significant influence
over the investee?
No
Yes
Account for the
investment as an
available-for-sale
security
Account for the
investment by using
the equity method
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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
Cash
Purchased 40% of PT
Berdikari common stock.
350 000 000
350 000 000
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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.
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14-5
On December 31, PT Berdikari pays
Rp45,000,000 in dividends.
Dec. 31 Cash
Investment in PT Berdikari Stock
Recorded 40% share of PT
Berdikari dividends.
18 000 000
18 000 000
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Investments and Dividends
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14-5
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Sale of Investments in Stocks
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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
Investment in PT Doni Tata Stock
Gain on Sale of Investments
17 500 000
15 700 000
1 800 000
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14-5
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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?
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14-5
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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
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Financial Analysis and Interpretation
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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.
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14-5
Earnings Per Share
Earnings per
Net Income
= Share of Common
Common Shares
Stock
Price - Earnings Ratio
Market Price Per Share
Priceof Common Stock
= Earnings
Earnings Per Share of
Ratio
Common Stock
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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.
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An example:
Market price per share
Earnings per share
Price-earnings ratio
2008
Rp2,460
Rp1,640
15.0
14-5
2007
Rp1,620
Rp1,350
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.
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