Question

At the beginning or 2013, Norris Company has a deferred tax liability of $6000, 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 2012 and 2013, but in 2012 Congress enacted a 40% tax rate for 2014 and future years.

Norris’s accounting records show the following pretax items fo financial income for 2013:  income from continuing operations, $150,000 (revenues of $368,000 and expenses of $218,000); gain on disposal of Division F, $26,600; extraordinary loss, $15,000; loss from operations of discontinued Division F, $10,300; and prior period adjustment, $16,800, due to an error that understated revenue in 2012.  All of these items are taxable; however, financial depreciation for 2013 on assets related to continuing operations exceeds tax depreciation by $5300.  Norris had a retained earnings balance of $166,000 on January 1, 2013, and declared and paid cash dividends of $33,000 during 2013. 

1. Prepare Norris’s income tax journal entry at the end of 2013.

DEC 31    Income Tax Payable

                Gain or Disposal on Division F

                Retained Earnings

                Deferred Tax Liabilities

                                       Extraordinary Loss

                                       Loss from operations of discontinued Division F

                                       Income Taxes payable

2. Prepare Norris’s 2013 Income Statement

    Revenues                                                                                          368,000

    Expenses                                                                                           218,000

    Pretax income from continuing operations

    Income Tax Expense

    Income from continuing operations

    Results from discontinued operations:

    Less: Loss from operation of discontinued Division F (net of income tax credit)

    Add: Gain on disposal of discontinued Division F (net of income taxes)

    Income before extraordinary loss

    Less: extraordinary loss (net of income tax credit)

    Net Income

3. Prepare Norris’s 2013 statement of retained earnings.

    Retained earnings, January 1, 2013                                          $166,000

    Add: Prior period adjustment (Net of taxes)

    Adjusted retained earnings, January 1, 2013

    Add: Net Income

   Less: Cash Dividends                                                                       33,000

    Retained Earnings, December 31, 2013 

4. Show the related income tax disclosures on Norris’s December 31, 2013 balance sheet.

    Current Liabilities

    Income Taxes Payable

    Noncurrent Liabilities

    Deferred Income Taxes

 

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