Question

At the beginning of 2016, 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 2015 and 2016, but in 2015 Congress enacted a 37% tax rate for 2017 and future years.

Norris’s accounting records show the following pretax items of financial income for 2016: income from continuing operations, $119,300 (revenues of $351,000 and expenses of $231,700); gain on disposal of Division F, $21,300; loss from operations of discontinued Division F, $8,700; and prior period adjustment, $14,800, due to an error that understated revenue in 2015. All of these items are taxable; however, financial depreciation for 2016 on assets related to continuing operations exceeds tax depreciation by $5,400. Norris had a retained earnings balance of $163,000 on January 1, 2016, and declared and paid cash dividends of $30,300 during 2016.

Required:

1.	Prepare Norris’s income tax journal entry at the end of 2016.
2.	Prepare Norris’s 2016 income statement.
3.	Prepare Norris’s 2016 statement of retained earnings.
4.	Show the related income tax disclosures on Norris’s December 31, 2016, balance sheet.

General Journal Shaded cells have feedback PAGE1 GENERAL JOURNAL Score: 64/73 DATE ACCOUNT TITLE POST. REF DEBIT CREDIT Dec. 31 Income Tax Expense Gain on Disposal of Discontinued Division Retained Earnings Deferred Tax Liability 6,390.00 4,440.00 Loss from Operations of Discontinued Division 2,610.00 Income Taxes Payable 45,630.00

Answer 1

Solution:

A) Journal Entry-

Date	Account titles and description	Debit ($)	Credit ($)
Dec 31, 2016	Income Tax Expense (Difference)	35,767
	Gain on Disposal of Division F ($21,300*30%)	6,390
	Retained Earnings (14,800*30%)	4,440
	Deferred Tax Liability ($4440*37%)	1,643
	Loss from operations of discontinued Division F ($8,700*30%)		2,610
	Income Tax Payable*		45,630

*Income Tax Payable

	Amount ($)
Income from Continuing Operations	119,300
Add: Gain on disposal of division F	21,300
Add: Decrease in Future Taxable amount	5,400
Add: Understand revenue	14,800
Less: Loss from operations of discontinued Division F	(8,700)
Taxable Income	152,100
Tax Liability @ 30%	45,630

B) Income Statement

	Amount ($)	Amount ($)
Revenues		351,000
Expenses		(231,700)
Pretax Income for Continuing Operations		119,300
Income Tax Expense		(35,637)
Income from Continuing Operations		83,663
Results from Discontinued Operations:
Less: Loss from Operations of Division F ($8,700-$2,610)	(6090)
Add: Gain on disposal ($21,300-$6390)	14,910	8,820
Net Income		92,483

C) Statement of Retained Earnings

	Amount ($)
Retained Earnings, January 1, 2016	163,000
Add: Prior period Adjustment (14,800-4,440)	10,360
Adjusted retained earnings, January 1, 2016	173,360
Add: Net Income	92,483
	265,843
Less: Cash Dividends	(30,300)
Retained Earnings, December 31,2016	235,543

D) Partial Balance Sheet

	Amount ($)
Current Liabilities
Income Tax Payable	45,630
Non-Current Liabilities
Deferred Income Taxes ($6400 beginning deferred tax liability-$1,643 decrease)	4,757