Question

The following table shows the balances from various accounts in the adjusted trial balance for UniLink Telecom Corp. as of December 31, 2020:

				Debit			Credit
a.		Interest income				$	29,600
b.		Depreciation expense, equipment	$	88,000
c.		Loss on sale of office equipment		60,200
d.		Accounts payable					101,600
e.		Other operating expenses		235,600
f.		Accumulated depreciation, equipment					184,400
g.		Gain from settling a lawsuit					102,400
h.		Cumulative effect of change in accounting principle (pre-tax)					152,400
i.		Accumulated depreciation, buildings					400,400
j.		Loss from operating a discontinued operation (pre-tax)		47,600
k.		Gain on expropriation of land and building by government					69,200
l.		Sales					2,369,200
m.		Depreciation expense, buildings		130,400
n.		Correction of overstatement of prior year’s sales (pre-tax)		36,800
o.		Gain on sale of discontinued operation’s assets (pre-tax)					80,000
p.		Loss from settling a lawsuit		58,400
q.		Income taxes expense		?
r.		Cost of goods sold		1,186,000

Required:
1. Assuming that the company’s income tax rate is 30%, what are the tax effects and after-tax measures of the items labelled as pre-tax? (Negative answers should be indicated by a minus sign.)

2. Prepare a multi-step income statement for the year ended December 31, 2020. (Amounts to be deducted should be indicated by a minus sign in the other revenues and expenses section and the discontinued operations section.)

Answer 1

Discontinued Operation and its results: Under US GAAP and IFRS, resiluts from the discontinued operation should be shown on face of the comprehensive income statement and should be shown sepreatly below the line of results fron normal operation sothat no one can mislead from the results assessment of the firm.

Adjustments:

(1) Prior Period error of Overstating The Sale: Since during previous year sale has been overstated so the tax on it also charged as expense and debited to that year profit, hence net overstating of profit/revenue is $ 25,760(36800-36800*30%). Similarly this item will be deducted from current year post tax profit as it has no effect on current year profit. Therefor while calculating Current year Tax expens, this overstated amount is added to pre tax current year profit.

(2) Adjustment h, About changes due to accounting principal, given as pre tax. Assume that it is effect of retrospective changes in accounts so that the current year income will be increases. But shown sepreatly in statement from current year normal operation.

(3) Gain on discontinued peration assets and Loss of Operation are shown Sepreatly. Assume gain on sale of assets is a business gain or say recovery of depreciation captcha hence business tax rate is applicable.

(4) Gain on expropriation of Building by Goverment. Since the expropriation price is not given for depreciable assets hence it is treated as recovery of depreciation from sale of assets. however another assumption can also be possible.

(5) Loss on Sale Of Equipments.; In Case of Depreciable assets Loss from sale of assets will be possible as business loss if the sale price of the assets is laying above the cost price but below the depreciable value of the assets. its loss value shows that this is an amount of depreciation which will be charged against profit, If such assets is not sold at present. Accumlated Depreciation of $ 1 84,400 means that firm has recovered from cost of the assets such AD from revenue department and after sale loss occurred and the sale price is lees then the depreciable value by $ 60 200. Hence trasfrred to current year profit and Loss A/c.

(6) Loss and gain from business law suits are treated as revenue nature and relates to normal business operation of the firm hence effect will be taken in Income statement.

The Extract of Income statement on the base of given transection is produced as below:

Extract of Income Statement
Particulars		Amount
Sales		$     2,369,200.00
Less: Cost of Goods Sold		$ (1,186,000.00)
Gross Profit from operation		$     1,183,200.00
Addition to Gross profit:
Interest income	$               29,600.00
Gain on Building expropriation	$               69,200.00
Gain from setting of Law Suits	$             102,400.00
	$             201,200.00
Less: Operating Exp	$          (235,600.00)
Depreciation- equipments	$             (88,000.00)
Depreciation on Building	$          (130,400.00)
Depreciation
Loss on sale of Equipments	$             (60,200.00)
Loss from setting a law suits	$             (58,400.00)
Prior Period Item(net of Tax)	$             (25,760.00)	$      (397,160.00)
Cummutative Effect of Change in principle		$        152,400.00
Effect of Discontinued Opperations:
Gain from discontinued operation	$               80,000.00
Loss from discontinued operation	$             (47,600.00)	$           32,400.00
Net Profit(pre tax)		$        970,840.00
Less: tax @ 30% (on accounting Income)		$        298,980.00
Net Profit(after Tax)		$        671,860.00