Chapter 12, Problem 4.2E

To determine

Non Ordinary Items

They are those items which are consist gains and losses on company’s income statement which are unusual and infrequent in nature.

The tax expense or benefit traceable for the two non-ordinary items.

Answer to Problem 4.2E

Net tax expense for non-ordinary items is $ $35,400$ .

Explanation of Solution

Determine the tax expense or benefit traceable to the two non-ordinary items.

Particulars	Ordinary income	Total income	Excluding non- ordinary loss	Excluding non-ordinary gain
First 6 months continuing.	$100,000$	$100,000$	$100,000$	$100,000$
Continuing.
Third quarter	$80,000$	$80,000$	$80,000$	$80,000$
Project continuing.	$20,000$	$20,000$	$20,000$	$20,000$
Non-ordinary loss.		$\left(40,000\right)$		$\left(40,000\right)$
Non-ordinary gain.		$60,000$	$60,000$
Pre-tax income
(loss)	$200,000$	$220,000$	$260,000$	$160,000$
Tax expense
(benefit)	$50,600$	$57,600$	$71,600$	$35,400$

Calculation of incremental tax expense: Incremental tax expense (benefit).

Particulars	Amount in $
All ordinary items $\left(\$57,600-\$50,600\right)$ $$	$7,000$ $$
All non-ordinary losses $\left(\$71,600-\$57,600\right)$	$14,000$
All ordinary gains $\left(\$7,000-\$14,000\right)$	$21,000$ $$

Calculation of net tax:

Particulars	Ordinary income	Total income	Excluding non- ordinary loss	Excluding non-ordinary gain
Pre-tax income
	$200,000$	$220,000$	$260,000$	$160,000$
Less: Exempt
income	$\left(4,000\right)$	$\left(4,000\right)$	$\left(4,000\right)$	$\left(4,000\right)$
Taxable income	$196,000$	$216,000$	$256,000$	$156,000$
Estimated tax:
$\begin{array}{l}\text{On first }\$50,000\hfill \\ @10\%\hfill \end{array}$	$5,000$	$5,000$	$5,000$	$5,000$
$\begin{array}{l}\text{On next }\$50,000\hfill \\ @20\%\hfill \end{array}$	$$ $10,000$	$10,000$	$10,000$	$10,000$
$\begin{array}{l}\text{On next }\$50,000\hfill \\ @30\%\hfill \end{array}$ $$ $\begin{array}{l}Onnext\$50,000\hfill \\ @30\%\hfill \end{array}$	$15,000$	$15,000$	$15,000$	$15,000$
$\begin{array}{l}\text{On next }\$50,000\hfill \\ @40\%\hfill \end{array}$	$20,000$	$20,000$	$20,000$	$20,000$
$\begin{array}{l}\text{On next }\$50,000\hfill \\ @35\%\hfill \end{array}$	$5,600$	$12,600$	$26,600$	-
Total Less: Tax credit	$55,600$ $\left(5,000\right)$	$62,200$ $\left(5,000\right)$	$76,600$ $\left(5,000\right)$	$40,400$ $\left(5,000\right)$
Less: Tax credit	$\left(5,000\right)$	$\left(5,000\right)$	$\left(5,000\right)$	$\left(5,000\right)$
Net Tax	$50,600$	$57,600$	$71,600$	$35,400$