Question

At the beginning of 2016, Norris Company had a deferred tax liability of $6,600, 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 39% 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, $120,000 (revenues of $353,200 and expenses of $233,200); gain on disposal of Division F, $21,100; loss from operations of discontinued Division F, $10,800; and prior period adjustment, $16,900, 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 $4,400. Norris had a retained earnings balance of $159,100 on January 1, 2016, and declared and paid cash dividends of $32,400 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.

Answer 1

1. Prepare Norris’s income tax journal entry at the end of 2016

Taxable Income = 120,000 + 21,100 - 10,800 + 16,900 + 4,400 = 151,600

(lesser tax depreciation than financial depreciation)

Tax Liability = $151,600 x 0.30 = 90,960

Income Tax Expense = 90,960 + 3,240 - 1716 - 5070 - 6,330 = 81,084

Journal Entry

Date	Particulars	Debit	Credit
Dec-31	Income Tax Expense	81,084
	Gain on Disposal of Discontinued Dvision	6,330
	Retained Earnings	5,070
	Deferred Tax Liability	1,716
	Loss from Operations of Discontinued Division		3240
	Income Taxes Payable		90,960

2. Prepare Norris’s 2016 income statement.

Income Statements
Revenue	353,200
Expenses	233,200
Pretax income from continuing operations	120,000
Income Tax Expense	81,084
Income from continuing operations	38,916
Results from discontinued operations:
Loss from operation of discontinued division F (net of $3240 income tax credit)	-7,560
Gain on disposal of discontinued Division F(net of $6,330 income taxes)	14,770
Income before extraordinary loss	46,126
Extraordinary Loss	0
Net Income	46,126

3. Prepare Norris’s 2016 statement of retained earnings.

Statement of Retained Earnings
Retained earnings, January 1, 2016	159,100
Add: Prior period adjustment, understatement of 2015 revenue (net of $5,070 income taxes)	11,830
Adjusted retained earnings, January 1, 2016	170,930
Add: Net Income	46,126
	217,056
Less: Cash Dividends	-32,400
Retained earnings, December 31, 2016	184,656

4. Show the related income tax disclosures on Norris’s December 31, 2016, balance sheet.

Partial Balance Sheet
Current Liabilities
Income Tax Payable	90,960
Non Current Liablities
Deferred Income Taxes	4,884*

*$6,600 beginning deferred tax liability - $1,716 decrease

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