Chapter 12, Problem 12.4P

To determine

Non-Ordinary Items

They are those items that consist of gains and losses on the company’s income statement which are unusual and infrequent in nature.

The tax expense or benefit to the two non-ordinary items.

Answer to Problem 12.4P

Net Tax expenses for value E is $\left(145,000\right)$ and value F is $\left(25,000\right)$ .

Explanation of Solution

Particulars	Amount in $
YTD income (loss)	$1,00,000$
Projected income (loss)	$1,00,000$
Total annual income (loss)	$200,000$
Carry forward of 2013 loss	$\left(80,000\right)$
Estimated annual taxable income	$120,000$
Estimated tax:
On first   $\$50,000@15\%$	$7,500$
On next   $\$50,000@20\%$   $$	$10,000$
On next   $\$50,000@25\%$	$5,000$
Remaining income   $@30\%$	-
Less: Tax credit
	$\begin{array}{l}22,500\\ (5,000)\end{array}$
Net tax	$17,500$
Effective Rate	$8.75\%$
Tax expense	$\begin{array}{l}8,750\hfill \end{array}$

Calculation of tax expense:

Effective interest rate $=\frac{Nettax }{Estimatedannualincome}$ × $100$

  $=\frac{ \$17,500 }{\$200,000}$ × $100$

  $= 8.75\%$

  $$

Calculation of tax expense :

Tax expense =Quarter 1 -restated continuing income × effective tax rate

  $= \$100,000$ × $8.75\%$

  $= \$8,750$

Item C

Tax expense originally reported for quarter 1

Particulars	Amount in $
Tax expense (benefit) traceable to restated:
	$8750$
Continuing operations
Discontinued operations	$(7406)$
Tax expense originally reported for quarter 1	$1,344$

Item D

Tax expense for quarter 2 income from continuing operations:

Particulars	Amount in $
Quarter 1 — restated income (loss)	$100,000$
Quarter 2 — income (loss)	$50,000$
YTD income (loss)	$150,000$
Projected income (loss)	$60,000$
Total annual income (loss)	$210,000$
Carry forward of 2013 loss	$\left(80,000\right)$
Estimated annual taxable income	$130,000$
Estimated tax:
On first   $\$50,000@15\%$	$7,500$
On next   $\$50,000@20\%$	$10,000$
On next   $\$50,000@25\%$	$7,500$
Remaining income   $@30\%$	-
Less: Tax credit	$\begin{array}{l}22,500\\ \left(5,000\right)\end{array}$   $$
Net tax	$20,000$
Effective tax rate	$9.52\%$
Tax expense	$14,280$

Calculation of effective tax rate:

Effective interest rate $=\frac{NetTax }{YTDIncome}$ × $100$

  $=\frac{20,000}{2,10,000}$ × $100$

  $= 9.52\%$

Calculation of tax expense:

Tax expense

= Quarter l -restated continuing income x Effective tax rate

  $=\$150,000$ × $9.52\%$

  $=\$14,280$

Item E

Particulars	Amount in $
Quarter 1 - restated	$\left(30,000\right)$
Quarter 2:
Operating loss	$\left(60,000\right)$
Realized loss on disposal	$\left(25,000\right)$
Impairment loss	$\left(30,000\right)$
Value of E	$\left(145,000\right)$

ITEM F

Particulars	Ordinary income	Total income	Total excluding Non- ordinary loss	Total excluding Non-ordinary gain
Pretax income (loss):
Continuing	$210,000$	$210,000$	$210,000$	$210,000$
Discontinued	_	$\left(145,000\right)$	-	$\left(145,000\right)$
Extraordinary	_	$20,000$	$20,000$	-
Pretax income
(loss)	$210,000$	$85,000$	$230,000$	$65,000$
Tax expense
(benefit)	$20,000$		$25,000$
Taxable income:
Pretax income	$210,000$	$85,000$	$230,000$	$65,000$
(loss) 2013 loss	$\left(80,000\right)$	$\left(80,000\right)$	$\left(80,000\right)$	$\left(80,000\right)$
Taxable income	$130,000$	$5,000$	$150,000$	$(150,000)$
Estimated tax: On first $\$50,000@15\%$ On next $\$50,000@20\%$ On next $\$50,000@25\%$ Remaining income $@30\%$ Less: Tax credit	$7,500$   $10,000$   $7,500$ -	$750$	$7,500$   $10,000$
			$12,500$
			$10,000$
	$25,000$   $\left(5,000\right)$	-   $(750)$	$30,000$   $\left(5,000\right)$
Net tax	$20,000$	-	$25,000$

Incremental tax expense (benefit)

PARTICULARS	AMOUNT IN $
Incremental tax expense (benefit) traceable to:
All non-ordinary items   $\left(\$0-\$20,000\right)$	$\left(20,000\right)$
All non-ordinary losses   $\left(\$0-\$25,000\right)—ValueofF$	$\left(25,000\right)$   $$

CONCLUSION Net Tax expenses for value E is $\left(145,000\right)$ and value F is $\left(25,000\right)$ .