Concept explainers
Comprehensive Colt Company reports pretax financial “income” of $143,000 in 2019. In addition to pretax income from continuing operations (of which revenues are $295,000), the following items are included in this pretax “income:”
Colt’s taxable income totals $93,000 in 2019. The difference between the pretax financial income and the taxable income is due to the excess of tax depreciation over financial depreciation on assets used in continuing operations.
At the beginning of 2019, Colt had a retained earnings balance of $310.000 and a
Required:
- 1. Prepare a schedule for Colt to allocate the total 2019 income tax expense to the various components of pretax income.
- 2. Prepare Colt’s income tax
journal entry at the end of 2019. - 3. Prepare Colt’s 2019 income statement.
- 4. Prepare Colt’s 2019 statement of retained earnings.
- 5. Show the related income tax disclosures on Colt’s December 31, 2019,
balance sheet .
1.
Prepare a schedule to distribute the income tax expense to the components of pre-tax income.
Explanation of Solution
Prepare a schedule to distribute the income tax expense to the components of pre-tax income:
Company C | |||||
Schedule of Income Tax Expense | |||||
For the Year Ended December 31, 2019 | |||||
Component of Income (pre-tax) | Amount | Tax rate |
Income Tax expense | ||
Income from continuing operations (1) | $50,000 | 15% | $7,500 | ||
$65,000 | 30% | $19,500 | |||
Loss from disposal of Division B | ($10,000) | 30% | ($3,000) | ||
Income from operation of discontinued Division B | $16,000 | 30% | $4,800 | ||
Prior period adjustment | ($8,000) | 30% | ($2,400) | ||
Total | $26,400 |
Table (1)
Working note 1: Determine the pre-tax income from continuing operations:
Particulars | Amount | Amount |
Total pre-tax accounting income | $143,000 | |
Less: Income from operation of discontinued Division B | ($16,000) | |
$127,000 | ||
Add: Loss from disposal of Division B | $10,000 | |
Prior period adjustment | $8,000 | |
Pre-tax income from continuing operations | $145,000 |
Table (2)
2.
Record the income tax entry for Company C.
Explanation of Solution
Income Tax Expenses: The expenses which are related to the taxable income of the individuals and business entities for an accounting period, and are recognized by them for the purpose of federal government and state government tax are called as income tax expenses.
Record the income tax entry for Company C.
Date | Accounts title and explanation | Post Ref. | Debit ($) | Credit ($) |
December 31, 2019 | Income Tax Expense (Refer table (1)) | 27,000 | ||
Income from discontinued division B | 4,800 | |||
Loss from Disposal of Division B | 3,000 | |||
Retained Earnings(prior period adjustment) | 2,400 | |||
Deferred Tax Liability (2) | 6,000 | |||
Income Tax Payable (3) | 20,400 | |||
(To record income tax expense with pretax income allocation) |
Table (3)
- Income Tax Expense is a component of stockholders’ equity and decreased, so debit it for $27,000.
- Income from discontinued division B is a component of stockholders’ equity and decreased, so debit it for $4,800.
- Loss from disposal of division B is a component of stockholders’ equity and increased, so credit it for $3,000.
- Retained Earnings is a component of stockholders’ equity and increased, so credit it for $2,400.
- Deferred Tax Liability is a liability and increased, so credit it for $6,000.
- Income Tax Payable is a liability and increased, so credit it for $20,400.
Working note 2: Compute the deferred tax liability:
Working note 3: Compute the income tax payable:
3.
Prepare an income statement of Company C for the year 2019.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare an income statement of Company C for the year 2019:
Company C | ||
Income statement | ||
For the year ended December 31, 2019 | ||
Particulars | Amount | Amount |
Revenues | $295,000 | |
Less: Expenses | ($150,000) | |
Pre-tax income from continuing operations | $145,000 | |
Less: Income tax expense | ($27,000) | |
Income from continuing operations | $118,000 | |
Results from discontinued operations: | ||
Income from disposal of discontinued Division F (net of $4,800 income taxes) | $11,200 | |
Loss from operation of discontinued Division F (net of $3,000 income tax credit) | ($7,000) | $4,200 |
Net income | $122,200 |
Table (4)
Thus, the net income of Company C is $122,200.
4.
Prepare statement of retained earnings of Company C for 2019.
Explanation of Solution
Statement of Retained Earnings: Statement of retained earnings shows, the changes in the retained earnings, and the income left in the company after payment of the dividends, for the accounting period.
Prepare the statement of retained earnings:
Company C | |
Statement of Retained Earnings | |
For the year ended December 31, 2019 | |
Particulars | Amount |
Retained earnings, January 1, 2019 | $310,000 |
Less: Prior period adjustment (net of $2,400 income taxes) | ($5,600) |
Adjusted retained earnings, January 1, 2019 | $304,400 |
Add: Net income | $122,200 |
$426,600 | |
Less: Cash dividends | ($48,000) |
Retained Earnings, December 31, 2019 | $378,600 |
Table (5)
Thus, the ending retained earnings for the year ended December 31 is $378,600.
5.
Explain the manner of reporting income tax disclosures in the balance sheet of Company C.
Explanation of Solution
Deferred tax asset: When Income Tax Expense account is more than the Income Tax Payable account, this difference is known as Deferred Tax Asset.
Deferred tax liability: When Income Tax Expense account is less than the Income Tax Payable account, this difference is known as Deferred Tax Liability.
Prepare balance sheet of Company C as on December 31, 2019:
Company C | |
Balance sheet (partial) | |
As on December 31, 2019 | |
Assets | Amount |
Current liabilities: | |
Income taxes payable | $20,400 |
Non- Current liabilities: | |
Deferred tax liability | $14,100 |
Total liabilities | $34,500 |
Table (6)
Thus, the total liabilities as on December 31, 2019 for Company C are $34,500.
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Chapter 18 Solutions
Intermediate Accounting: Reporting And Analysis
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