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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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Disclosure of Intraperiod Tax Allocation Lester Corporation reports $119,000 of both pretax accounting “income” and taxable income in 2019. In addition to income from continuing operations (of which revenues are $500,000), included in this “income” is a $17,000 loss from operations of discontinued Division W, a $15,000 gain on the disposal of Division W, and a $14,000 correction of an error due to the understatement of bad debt expense in 2018. Lester is subject to a 20% tax rate on the first $50,000 of income and a rate of 25% on income in excess of $50,000.

Required:

  1. 1. Show how this information is disclosed on Lester’s 2019 income statement.
  2. 2. Prepare Lester’s 2019 statement of retained earnings. (Assume a beginning retained earnings balance of $191,000 and cash dividends during 2019 amounting to $65,000.)

1.

To determine

Explain the manner of disclosing the information in Corporation L’s income statement.

Explanation

Intra-period tax allocation: Intra-period tax allocation is the portion of a company’s total income tax expense during a period to the components of its income statement, the retained earnings schedule within the statement of retained earnings, and the comprehensive income within the statement of stockholders’ equity.

The manner of disclosing the information in Corporation L’s income statement is as follows:

ParticularsAmountAmount
Revenues  $500,000
Less: expenses ($340,000)
Pretax income from continuing operations $160,000
Income tax expense  ($37,500)
Income from discontinued operations $122,500
Results from discontinued operations:  

 Loss from operations of discontinued Division W

(net of $4,250 income tax credit)

($12,750) 
Gain on disposal of Division W (net of $3,750 income tax credit)$11,250($1,500)
Net income $121,000

Table (1)

Working note 1: Calculate the pretax income from continuing operations:

ParticularsAmount
Total pretax income$119,000
Less: Gain on disposal of Division W($15,000)
 $104,000
Add: Loss from operations of discontinued Division W$17,000
Prior period adjustment$14,000
Pretax income from continuing operations$135,000

Table (2)

Working note 2: Determine the expenses for the period:

Expense=Revenue(

2.

To determine

Prepare the statement of retained earnings for Corporation L.

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