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%.
(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.