Question

Disclosure of Intraperiod Tax Allocation

Lester Corporation reports $119,000 of both pretax accounting "income" and taxable income in 2016. 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 2015. 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. Show how this information is disclosed on Lester's 2016 income statement.

LESTER CORPORATION
Income Statement
For Year Ended December 31, 2016
Revenues		$
Expenses
Pretax income from continuing operations		$
Income tax expense
Income from continuing operations		$
Results from discontinued operations:
Loss from operations of discontinued Division W (net of income tax credit)	$
Gain on disposal of Division W (net of income taxes)
Net income		$

2. Prepare Lester's 2016 statement of retained earnings. (Assume a beginning retained earnings balance of $191,000 and cash dividends during 2016 amounting to $65,000.)

LESTER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, January 1, 2016	$
Less: Prior period adjustment, understatement of 2015 bad debt expense (net income tax credit)
Adjusted retained earnings, January 1, 2016	$
Add: Net income
	$
Less: Cash dividends
Retained earnings, December 31, 2016	$

Answer 1

1	Calculation of Income tax expenses
	Income from ongoing operations	$50000*20%	$10,000
	Income from ongoing operations	$69000*25%	$17,250
	Gain on disposal of terminated div W	$15000*25%	$3,750
	Loss from operations of terminated Div W	$17000*25%	($4,250)
	Understatement of bad debt exp	$14000*25%	($3,500)
	Total Income tax exp		$23,250
	LESTER CORPORATION Income Statement For Year Ended December 31, 2016
	Revenues		500000
	Less Exp(500000-119000)		-381000
	Pretax income from continuing operations		119000
	less Income tax (10000+17250)		-27250
	Income from ongoing operations		91750
	Add results of terminated operations
	Gain from disposal of terminated div W
	(15000-3750)		11250
	Loss from operations of terminated
	Div W-(17000-4250)		-12750
	Income before extraordinary loss		90250
	Net Income		90250
2	Statement of Retained earnings
	Retained earnings as on Jan 1 2016		191000
	Less prior period adj (under statement of bad debt exp)	(14000-3500)	-10500
	Adjusted Retained earnings		180500
	Add Net Income		90250
			270750
	Less cash Dividends		-65000
	Retained earnings as on 31st Dec 2016		205750