510chapter4fall2009afterclass9292009

510chapter4fall2009afterclass9292009 - Chapter 4 Income...

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Unformatted text preview: Chapter 4 Income Statement and Related Information Relates the income tax expense to the specific items that give rise to the amount of the tax expense. Income tax is allocated to the following items: (1) Income from continuing operations before tax (2) Discontinued operations (3) Extraordinary items (4) Changes in accounting principle (5) Correction of errors Intraperiod Tax Allocation Extraordinary Gain: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary gain of $100,000 from a condemnation settlement received on one its properties. Assuming a 30 percent income tax rate. Intraperiod Tax Allocation Extraordinary Loss: Schindler Co. has income before income tax and extraordinary item of $250,000. It has an extraordinary loss from a major casualty of $100,000. Assuming a 30 percent income tax rate. Intraperiod Tax Allocation I nt er est ex pense (21,000) Tot al ot her (4,000) I ncome f r om cont . oper . bef or e t ax es 79,000 I ncome t ax ex pense 24,000 I ncome f rom cont inuing operat ions 55,000 Discont inued operat ions: Loss on operat ions, net of $ 135 t ax 315 Loss on disposal, net of $ 61 t ax 189 Tot al loss on discont inued operat ions 504 I ncome bef ore ext raordinary it em 54,496 Ext raordinary loss, net of $ 231 t ax 539 N et income 53,957 $ I ncome St at ement (in t housands) Sales 285,000 $ Cost of goods sold 149,000 Total Tax Allocated Total Tax Allocated Example of Intraperiod Tax Allocation $24,000 $24,000 (135) (135) (61) (61) (231) (231) $23,573 $23,573 Note: losses reduce the total Note: losses reduce the total tax tax Retained Earnings Statement Increase Net income Change in accounting principle Error corrections Decrease Net loss Dividends Change in accounting principles Error corrections Changes in Retained Earnings Corrections of Errors Result from: mathematical mistakes mistakes in application of accounting principles oversight or misuse of facts Corrections treated as prior period adjustments Adjustment to the beginning balance of retained earnings Reporting Irregular Items Corrections of Errors : To illustrate, in 2011, Hillsboro Co. determined that it incorrectly overstated its accounts receivable and sales revenue by $100,000 in 2010. In 2011, Hillboro makes the following entry to correct for this error (ignore income taxes). Reporting Irregular Items Retained earnings 100,000 Accounts receivable 100,000 Woods, Inc. Statement of Retained Earnings For the Year Ended December 31, 2007 Balance, January 1 1,050,000 $ Net income 360,000 Dividends (300,000) Balance, December 31 1,110,000 $ Before issuing the report for the year ended December 31, 2007, you discover a $50,000 error (net of tax) that caused the 2006 inventory to be overstated (overstated inventory caused COGS to be lower and thus net income to be higher in 2006). Would this discovery have any impact on the reporting of the Statement of Retained Earnings for 2007?...
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510chapter4fall2009afterclass9292009 - Chapter 4 Income...

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