Refer
to the information in E18-4 for Raman Limited. Assume that the company reports
under private enterprise standards and that the taxes payable method of
accounting is used for income taxes.
In
E Raman Limited had investments in securities on its balance sheet for the
first time at the end of its fiscal year ending December 31, 2012. Raman
reports under IFRS and its investments in securities are to be accounted for at
fair value through net income. During 2012, realized losses and gains on the
trading of shares and bonds resulted in investment income, which is fully
taxable in the year. Raman also accrued unrealized gains at December 31, 2012,
which are not taxable until the investment securities are sold. The portfolio
of trading securities had an original cost of $314,450 and a fair value on
December 31, 2012, of $318,200. The entry recorded by Raman on December 31,
2012, was as follows:
Investments
(FV-NI) 3,750
Investment
Income/Loss (FV-NI) 3,750
Income
before income taxes for Raman was $302,000 for the year ended December 31,
2012. There are no other permanent or reversing differences in arriving at the
taxable income for Raman Limited for the fiscal year ending December 31, 2012.
The enacted tax rate for 2012 and future years is 42%.
Instructions
(a)
Prepare the journal entry(ies) to record income taxes at December 31, 2012.
(b)
Prepare the income statement for 2012, beginning with the line “Income before
income taxes.”
(c)
Provide the balance sheet presentation for any resulting income tax balance
sheet accounts at December 31, 2012.
(d)
Prepare the disclosures that are necessary because the taxes payable method is
being used.
(e)
Now that Raman Limited has adopted the taxes payable method, what do you believe
would be the reaction of creditors to this accounting policy when they read
Raman’s financial statements? Explain.
(a) Current
Income Tax Expense....................................... 125,265
Income
Tax Payable............................................. 125,265
(b) Income
before income taxes $302,000
Income tax expense 125,265
Net income $176,735
(c) Current
liabilities:
Income taxes payable $125,265
(d)
Additional disclosures would include a statement that
the taxes payable method is being used and a brief description of what it
entails, along with:
1. income tax expense or benefit included in determining
income (loss) before discontinued operations; and the amount related to
transactions recognized in equity;
2. a reconciliation of the actual tax rate or expense or
benefit to the statutory amount for income (loss) before discontinued
operations, with information about major reconciling items;
3. the amount of reserves to be included in taxable
income in each of the next five years; and the amount of unused income tax credits
and losses carried forward.
(e) Raman
is providing all of the necessary and relevant disclosure as mentioned in (d)
above. Creditors can therefore interpret the effect of adopting the taxes
payable or differential method of accounting for the income tax accounts.
Creditors will also understand Raman’s motivation in adopting this method. The
benefits of the alternative method are likely exceeded by unnecessary and
possibly excessive costs of providing the additional information.
