Question

Colt Company reports pretax financial “income” of $143,000 in 2016. In addition to pretax income from continuing operations (of which revenues are $295,000), the following items are included in this pretax “income:” Problems Colt's taxable income totals $93,000 in 2016. The difference between the pretax financial income and the taxable income is due to the excess of tax depreciation over financial depreciation on assets used in continuing operations. At the beginning of 2016, Colt had a retained earnings balance of $310,000 and a deferred tax liability of $8,100. During 2016, Colt declared and paid dividends of $48,000. It is subject to tax rates of 15% on the first $50,000 of income and 30% on income in excess of $50,000. Based on proper interperiod tax allocation procedures, Colt has determined that its 2016 ending deferred tax liability is $14,100.

Required: Prepare a schedule for Colt to allocate the total 2016 income tax expense to the various components of pretax income.
Prepare Colt's income tax journal entry at the end of 2016. Prepare Colt's 2016 income statement.
Prepare Colt's 2016 statement of retained earnings. Show the related income tax disclosures on Colt's December 31, 2016, balance sheet.

Answer 1

1.                                                            COLT COMPANY

                                                   Schedule of Income Tax Expense

                                                 For Year Ended December 31, 2016

                                                                                     

Component (Pretax)	Pretax Amount	x	Income Tax Rate	=	Income Tax Expense (Credit)
Income from continuing operations	$50,000 $65,000	x x	0.15 0.30	= =	$7,500 $19,500
Loss from disposal of Division B	(10,000)	x	0.30	=	(3,000)
Income from operations of discontinued Division B	16,000	x	0.30	=	4,800

Prior period adjustment	(8,000)	x	0.30	=	(2,400)
Total income tax expense					$26,400

2.   2016
31-Dec	Income Tax Expense		27,000
	Income from Operations of Discontinued Division B		4,800
		Loss from Disposal of Division B		3,000
		Retained Earnings (prior period adjustment)		2,400
		Deferred Tax Liability		6,000
		Income Taxes Payable		20,400

3.                                                            COLT COMPANY

                                                               Income Statement

                                                 For Year Ended December 31, 2016

Revenues $295,000

Expenses                                                                                                     (180,000)

Pretax income from continuing operations $ 115,000

Income tax expense   (27,000)

Income from continuing operations $ 88,000

Results of discontinued operations:

Income from operation of discontinued Division B (net of $4,800 income taxes)             $11,200

Loss from disposal of Division B (net of $3,000 income tax credit)                                    (7,000) $4,200

Net Income                                                                                                $ 92,200

4.                                                            COLT COMPANY

                                                     Statement of Retained Earnings

                                                 For Year Ended December 31, 2016

Retained earnings, January 1, 2016                                                     $310,000

Less: Prior period adjustment (net of $2,400 income tax credit)            (5,600)

Adjusted retained earnings, January 1, 2016                                       $304,400

Add:   Net income    92,200

  $396,600

Less: Cash dividends                                                                           (48,000)

Retained earnings, December 31, 2016 $348,600

5.

Current Liabilities

Income taxes payable                                                                     $20,400

Non current Liabilities

Deferred tax liability $ 6,000