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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Comprehensive At the beginning of 2019, Norris Company had a deferred tax liability of $6,400, because of the use of MACRS depreciation for income tax purposes and units-of-production depreciation for financial reporting. The income tax rate is 30% for 2018 and 2019, but in 2018 Congress enacted a 40% tax rate for 2020 and future years.

Morris’s accounting records show the following pretax items of financial income for 2019: income from continuing operations, $120,000 (revenues of $352.000 and expenses of $232,000); gain on disposal of Division F, $23,000; loss from operations of discontinued Division F, $10,000; and prior period adjustment, $15,000, due to an error that understated revenue in 2018. All of these items are taxable; however, financial depreciation for 2019 on assets related to continuing operations exceeds tax depreciation by $5,000. Norris had a retained earnings balance of $161,000 on January 1, 2019, and declared and paid cash dividends of $32,000 during 2019.

Required:

  1. 1. Prepare Norris’s income tax journal entry at the end of 2019.
  2. 2. Prepare Norris’s 2019 income statement.
  3. 3. Prepare Norris’s 2019 statement of retained earnings.
  4. 4. Show the related income tax disclosures on Norris’s December 31, 2019, balance sheet.

1.

To determine

Record the income tax entry for Company N.

Explanation

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 N.

DateAccounts title and explanationPost Ref.Debit ($)Credit ($)
2019    
December 31Income Tax Expense (balancing figure) 30,100 
 Gain on disposal of division  F 6,900 
 Retained Earnings (prior period adjustment) 4,500 
 Deferred Tax Liability 2,000 
 Loss from Disposal of Division F  3,000
     Income Tax Payable  40,500
 (To record income tax expense with pre-tax income allocation)   

Table (1)

  • Income Tax Expense is a component of stockholders’ equity and decreased, so debit it for $30,100
  • Gain on disposal of division F is a component of stockholders’ equity and decreased, so debit it for $6,900.
  • Retained Earnings is a component of stockholders’ equity decreased, so debit it for $4,500.
  • Deferred Tax Liability is a liability and decreased, so debit it for $2,000...

2.

To determine

Prepare an income statement of Company N for the year 2019.

3.

To determine

Prepare statement of retained earnings of Company N for 2019.

4.

To determine

Explain the manner of reporting income tax disclosures in the balance sheet of Company N.

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