Portland Pens CorporationStatement of Cash Flows ExampleWith After-tax AOCI Accounts

An Excel working paper is available to solve this problem (includes a “print version” if you prefer to do it by hand). We will use the “partially completed” version in class.

Additional information:

a.  Portland Pens Corporation sold marketable securities that had cost $120,000 for $100,000.

b.  Portland Pens purchased marketable securities during the year which resulted in a year-end fair value of $740,000.

c.  The holding gains and losses in accumulated other comprehensive income will be taxed at the capital gains rate of 20%.

d.  During the year, Portland Pens Corporation paid quarterly dividends in the total amount of $110,000. done

e.  Portland Pens acquired a patent on a revolutionary new type of ink for its pens in exchange for 1,000 shares of common stock. At the date of the transaction, the common stock was trading at $58. done

f.  Portland Pens Corporation acquired new processing equipment for a total cost of $1,000,000. done

g.  Portland Pens Corporation wrote off $5,000 in bad debts during the year.done

h.  Half of the 1,000 shares of treasury stock were sold for $66 per share. Portland Pens Corporation uses the cost method. The treasury stock on hand at the beginning of the year was carried at $52 per share.

i.  Portland Pens has a pension plan. The contribution to the plan for 2006 was $30,000. The tax rate related to deferred taxes on accumulated other comprehensive income items related to the pension plan was 40%.

Tips for handling AOCI – holding gain/loss and post-retirement items

1.   The before-tax change is more clearly related to the other balance sheet accounts involved with the items. For example, the change in the allowance account for available for sale securities is presented before tax. For the pension obligation (or asset), the change is related to the before tax figures for amortizations of transition amounts, prior service cost or actuarial gain/loss as well as other gains and losses due to changes in actuarial assumptions are before tax in the pension or OPEB journal entry.

2.   Accordingly, your first step is to REMOVE the deferred taxes for the year from each AOCI account with the opposite side of the entry in the regular deferred tax account (either an asset or a liability). For example, the change in AOCI for available for sale securities is $48,000. Divide by (1-t) to get before tax. In this case, (1-t) = 80%. $48,000/.8 = $60,000. So the tax is $12,000 (60,000 – 48,000). Likewise, AOCI for PSC change is 12,000 divided by (1-.4) = $20,000 before tax so the tax included is $8,000.

3.   After you remove the taxes with the opposite dr/cr to deferred taxes, you will have the pre-tax changes left.

  1. The pre-tax change related to available for sale securities will perfectly offset the change in the related allowance account.
  2. The pre-tax changes in AOCI accounts related to pensions and other postretirement benefit accounts can then be offset against the pension liability (or asset) account.

4.   Once you’ve dealt with all the deferred taxes in AOCI, the remaining change in the deferred income taxes account is related to income tax expense in the income statement section (for the direct method). For the indirect method, you will have two reconciling amounts (that can be combined). They will be the entire change in the deferred tax account (from the target column) less the taxes reported on the statement of comprehensive income (SCI). If the SCI is shown net of tax, you will need to refer to the notes of the financial statement to determine the tax effects or estimate it from given tax rate information as shown under #3 above).

5.   After you’ve offset all the pre-tax changes in AOCI items related to pensions to the respective pension or OPEB asset or liability account, the remaining change during the year will be the difference between what was expensed and what was contributed to the pension plan. Take this remaining change to pension expense in the income statement section (direct method). For the indirect reconciliation, you will have a line for the difference between pension expense and the amount contributed to plan assets (or used to pay retirees if there are no plan assets).

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