ACCT 3870 Exam 2

Chapters 16, 18, 19

permanent differences

income item is included in taxable income or accounting income but will never reverse in the future

temporary differences

arise when tax rules and accounting rules recognize income in different periods

computation of income tax payable

pre-tax accounting income (IS) ± permanent differences ± temporary differences = taxable income (tax return) * statutory tax rate = income tax payable (current income tax expense)

Deferred tax liability (DTL)

recognized when activities reported in the current period’s income statement will produce future taxable amounts (lower taxable income now and higher taxable income later)

DTL examples

• revenues and gains

  • accrued installment sales of property

  • unrealized gain from investment at fair value

• expenses and losses

  • accelerated depreciation on the tax return but straight-line depreciation in the income statement

  • prepaid expenses (tax deductible when paid)

    
    

deferred tax assets (DTA)

recognized when activities reported in the current period’s income statement will produce future deductible amounts (higher taxable income/ tax in current period but lower taxable income/ tax in future periods)

DTA examples

• revenues and gains

  • rent collected in advance

  • subscriptions collected in advance

• expenses and losses

  • accrued expenses or losses

  • unrealized loss from investment at fair value

net operating losses (NOL)

tax laws often allow a company to use tax NOLs to offset taxable income in earlier or subsequent periods

• when used to offset earlier taxable income: carryback (Tax refund)

• when used to offset future taxable income: carryforward (reduced tax payable)

how to account for a net carryback

• dr cash or tax refund receivable

• cr income tax expense benefit

• maximum carryback period is 2 years

how to account for a carryforward

• dr deferred tax asset

• cr income tax expense benefit

• can carryforward up to 20 years

what are the rights of common stockholders

• voting rights

• the right to share in profits when dividends are declared, but dividends do not have to be declared

• the right to share in the liquidation of the corporation’s assets

what are the rights of preferred stockholders

• dividend preferences

• liquidation preference

• preferred shares are generally non-voting

what are the two ways shares can be repurchased

• repurchase and immediate retirement

• repurchase as treasury stock

how to account for stock retirement when they’re repurchased at a higher price

• dr common stock, PIC- common stock, PIC - share repurchase (if they are available), retained earnings

• cr cash

how to account for stock retirement if shares cost less than they were sold for

• dr common stock, PIC - common stock

• cr PIC - share repurchase, cash

how to account for recording treasury stocks

• dr treasury stock

• cr cash

accounting for the reissuance of treasury account

• share is sold for more than bought at

  • dr cash

  • cr treasury stock, PIC - repurchase

• share is sold for less than bought at

  • dr cash, PIC - repurchase, RE

  • cr treasury stock

how to calculate dividends on preferred stock

% * par value of preferred stock * # of preferred stock

property dividends

noncash assets distributed to shareholders as dividends

recording property dividends

• declaration date

  • dr investment in company, RE

  • cr gain on investment, property dividend payable

• date of record

  • no journal entry

• payment date

  • dr property dividend payable

  • investment in company

stock dividends

distribution of additional shares of stock to current shareholders of the corporation

what is clarified as a small vs large stock dividend

• small: <25%

• large: >25%

how to account for small stock dividend

• dr RE

• cr common stock, PIC - excess of par

how to account for large stock dividend

• dr RE

• cr common stock

stock splits

the induce the per share market price decline, which increases the stock’s marketability by making it attractive to a larger number of potential investors (no journal entries for stock splits unless it’s in the form of a stock dividend)

restricted stock awards (RSA)

shares are issued at the grant date but subject to certain restrictions and forfeiture

restricted stock units (RSU)

shares are issued at the end of the vesting period

how to find compensation expense

• awarded stock * market price per share

• find yearly compensation expense by dividing it by the number of years of the vesting period

how to account for RSA

• issued but restricted till vesting

  • dr deferred compensation

  • cr common stock, additional PIC

• compensation expense

  • dr compensation exp (per year version)

  • cr deferred compensation

how to account for RSU

• grant date

  • no entry

• yearly compensation expenses

  • dr compensation exp

  • cr PIC - restricted stock

• expiration date

  • dr PIC - restricted stock

  • cr common stock, APIC

stock option plans

a form of stock - based compensation that gives the recipient:

• the right to purchase a share

• at a fixed price

• for a specified period of time

earnings per share (EPS)

a way of summarizing the performance of business enterprise into a single number

basic earnings per share

basic EPS = NI / weighted average number of CS outstanding

what affects basic EPS

• NI

  • - preferred dividends

• # of CS

  • + new stocks

  • + stock dividends

  • + stock splits

  • - stock repurchace

what affects diluted EPS (in addition to basic EPS)

• NI

  • + convertible bonds

  • + convertible preferred stock

• # of CS

  • + stock options

  • - stock options

  • + convertible bonds

  • + convertible preferred stock