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)
Explain the tax treatment that should be given to the unrealized gain that
Raman Limited reported on its income statement.
(b)
Calculate the future income tax balance at December 31, 2012.
(c)
Calculate the current income tax for the year ending December 31, 2012.
(d)
Prepare the journal entries to record income taxes for 2012.
(e)
Prepare the income statement for 2012, beginning with the line “Income before
income taxes.”
(f)
Provide the balance sheet presentation for any resulting income tax balance
sheet accounts at December 31, 2012. Be clear on the classification you have
chosen and explain your choice.
(g)
Repeat part (f) assuming Raman follows the PE GAAP future income taxes method
and has chosen the fair value through net income model to account for its
securities investments.
(a) The
investments must be reported on the balance sheet at their fair value. The
resulting difference between this and the tax value of the investments (cost of
$314,450) represents a temporary difference. The gain recognized is not taxable
(nor any accrued unrealized loss deductible) until the investments are sold at
a gain or at a loss. The resulting taxable temporary difference must have the
corresponding future tax recorded at the tax rate that Raman expects to pay (or
recover in the case of a loss) on this gain or loss in future accounting
periods. In this case the enacted rate
is 42% that needs to be applied to arrive at the amount of any future taxes.
(b)
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Future
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Balance
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(Taxable)
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Income
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Sheet
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Carrying
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Tax
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Temporary
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Tax
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Tax
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Account
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Amount
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–
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Basis
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=
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Difference
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X
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Rate
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(Liability)
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Invest.
(FV-NI)
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$318,200
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$314,450
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($3,750)
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42%
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($1,575)
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(c)
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Accounting income
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$302,000
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Reversing difference: Holding gain on Investments (FV-NI)
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(3,750)
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Taxable
income
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$298,250
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Current income taxes at 42%
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$125,265
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(d)
Current Income Tax Expense.............. 125,265
Income Tax
Payable.................. 125,265
Future Income Tax Expense............... 1,575
Future
Income Tax Liability......... 1,575
($1,575
– opening balance of $0)
(e) Income before income
taxes $302,000
Income tax expense
Current $125,265
Future 1,575 126,840
Net income $175,160
(f) Current
liabilities:
Income
taxes payable $125,265
Non-current liabilities:
Future income
tax liability $ 1,575
Under IFRS, all deferred tax assets and liabilities
are reported as noncurrent items on a classified statement of financial
position.
(g) Current
liabilities:
Income
taxes payable $125,265
Future
income tax liability 1,575
Current income taxes are due well within 12 months of
the balance sheet date, therefore, they are classified as a current liability.
The classification for the future income tax account
must also be current since the temporary difference relates to an asset that is
classified as current on the balance sheet. Investments accounted for at fair
value through net income must be classified as current as they were acquired to
be actively traded by Raman and are converted to cash in short periods of time.
Under PE GAAP, future tax assets and future tax liabilities are segregated into
current and noncurrent categories, so Raman’s FIT liability would be classified
as current on a classified balance sheet.
