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.