Refer
to the information for Raman Limited in E18-4. Following the year ended
December 31, 2012, Raman continued to actively trade its securities investments
until the end of its 2013 fiscal year, when it was forced to sell several of
them at a loss, because of the need for cash for operations. By December 31,
2013, the portfolio of investments contained a single investment in shares,
which was purchased in November 2013. Raman Limited had paid $42,000 for these
remaining shares. At December 31, 2013, the shares' market value was $40,000.
Income before income taxes for Raman was $120,000 for the year ended December
31, 2013. There are no other permanent or timing differences in arriving at the
taxable income for Raman Limited for the fiscal year ending December 31, 2013.
The enacted tax rate for 2013 and future years is 42%.
Instructions
(a)
Prepare the necessary journal entry for Raman Limited to accrue the unrealized
loss on its securities investments.
(b)
Explain the tax treatment that should be given to the unrealized accrued loss
that Raman Limited reported on its income statement.
(c)
Calculate the future income tax balance at December 31, 2013.
(d)
Calculate the current income tax for the year ending December 31, 2013.
(e)
Prepare the journal entries to record income taxes for 2013. Assume that there
have been no entries to the ending balances of future taxes reported at
December 31, 2012.
(f)
Prepare the income statement for 2013, beginning with the line "Income
before income taxes."
(g)
Provide the balance sheet presentation for any resulting future tax balance
sheet account at December 31, 2013. Be clear on the classification you have
chosen and explain your choice.
(h)
Prepare the journal entries in part (e) under the assumption that, late in
2013, the income tax rate changed to 40% for 2014 and subsequent years.
(i)
Repeat the balance sheet presentation in part (g) assuming Raman reports under
the PE GAAP future income taxes method and has chosen the fair value through
net income model to account for its securities investments.
(a)
Investment
Income/Loss (FV-NI)..... 2,000
Investments
(FV-NI)............. 2,000
(b) As
discussed in Exercise 18-4 the difference between the carrying amount ($40,000)
and the tax value ($42,000) at December 31, 2013 is a temporary difference. The
loss is not deductible until the investments are sold. The resulting deductible
temporary difference must have the corresponding future tax recorded at the tax
rate that Raman expects to recover on this loss in future accounting
periods. In this case the enacted rate
of 42% needs to be applied to arrive at the amount of any future taxes.
(c)
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Future
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Balance
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Deductible
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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 Asset
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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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$40,000
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$42,000
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$2,000
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42%
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$840
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Balance before adjustment
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(1,575)
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Adj. to future tax account
and future income tax benefit for 2013
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$2,415
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(d)
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Accounting income
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$120,000
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Reversing difference: Holding loss on Invest. (FV-NI)
Reversing difference: 2012
holding gain realized in 2013
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2,000
3,750
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Taxable
income
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$125,750
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Current income taxes at 42%
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$52,815
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Current income tax expense for 2013 $52,815
(e)
Current Income Tax Expense.............. 52,815
Income Tax
Payable.................. 52,815
Future Income Tax Asset................. 840*
Future Income Tax Liability............. 1,575*
Future
Income Tax Benefit........... 2,415
* Alternatively, if one balance sheet account—a
Future Income Tax Asset/Liability account—is used, a debit balance indicating
an asset and a credit balance indicating a liability, the entry would be:
Future Income Tax Asset/Liability....... 2,415
Future
Income Tax Benefit........... 2,415
(f) Income
before income taxes $120,000
Income tax expense
Current $52,815
Future (Benefit) (2,415) 50,400
Net income $69,600
(g) Noncurrent
assets
Future income tax asset $840
IFRS
require that all deferred tax assets and liabilities be reported as noncurrent
items on a classified statement of financial position.
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(h)
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Future
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Balance
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Deductible
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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 Asset
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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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$40,000
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$42,000
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$2,000
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40%
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$800
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Balance before adjustment
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(1,575)
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Adj. to future tax account
and future income tax benefit for 2013
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$2,375
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Current Income Tax Expense.............. 52,815
Income Tax
Payable.................. 52,815
Future Income Tax Asset................. 800*
Future Income Tax Liability............. 1,575*
Future
Income Tax Benefit........... 2,375
* or Future Income Tax Asset/Liability.. 2,375
(i) Current
assets
Future income tax asset $840
The classification must be current since the
temporary difference relates to an asset that is classified as current on the
balance sheet. The FV-NI Investments must be classified as current as they were
acquired for trading purposes by Raman and are converted to cash in short
periods of time.
