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.

**Please note the answers posted are not correct and I do NOT have any additional information to post. Thanks!

Answer 1

1. Income tax journal entry at the end of 2016:

Income tax expense Dr	44,010
Deferred tax liability Dr	1,620
To Taxes payable		45,630

2. Income statement:

Norris Company
Income statement for the year ending December 31, 2016
Revenue	351,000
Operating Expenses	231,700
Income before tax	119,300
+ Gain on disposal of division F	21,300
-Loss from discontinued operations	8,700
+Prior period adjustment	14,800
Profit before tax	146,700
Income tax	44,010
Profit after tax	102,690

Workings for Journal entry:

Profit before tax	146,700
+Excess depreciation	5,400
Taxable Income	152,100
Tax payable @30%	45,630
less: Income tax expense	44,010
Adjustment to deferred tax liability	1,620

3.

Norris Company
Statement of retained earnings for the year ended December 31, 2016
Retained earnings as of Jan 1, 2016	163,000
+ Prior period adjustments	14,800
Retained earnings as of Jan 1, 2016, adjusted	177,800
Add: Net income for 2016 after tax	102,690
Less: Dividends	30,300
Retained earnings as of Dec 31, 2016	250,190

Income tax disclosure
Current year	41,190
Prior year adjustments	4,440
	45,630
Deferred tax
Reversal of temporary difference	(1,620)
Increase in tax rate	1,115
Total tax	45,125

Current year tax includes income from continuing operations, gain on disposal of a division and loss from discontinued operations. Prior year adjustment is related to revenue understatement in 2015.

This year, there has been a rate change enacted for 2017 and future years increasing the rate from 30% to 37%. This change resulted in an additional tax expense of $1,115.