Chapter 17, Problem 6APSA

Requirement 1

To determine

To Prepare:

The income tax effects and after tax amounts

Answer to Problem 6APSA

Solution:

The income tax effects and after tax amounts are given below

Effect of income taxes (debits or losses is shown in negative amount)
Particulars	Pretax	30% Tax Effect	After-Tax
l. Loss from operating a discontinued segment	-18,250	-5,475	-12,775
j Gain on insurance recovery of tornado damages	29,120	8,736	20,384
m. Correction of overstatement of prior year’s sale	-16,000	-4,800	-11,200
n. Gain on sale of discontinued segment’s assets	34,000	10,200	23,800

Explanation of Solution

The following assumptions is taken

• The tax rate is given 30%
• The pre tax labeled items have to be calculated for tax effects

The calculation of tax income tax effects and after tax amounts in excel is given below

Effect of income taxes (debits or losses is shown in negative amount
Particulars	Pretax	30% Tax Effect		After-Tax
	Amount($)	Tax rate	Tax amount	Amount($)
	A	B	C=A x B	D=A-C
l. Loss from operating a discontinued segment	-18,250	30%	-5,475	-12,775
j Gain on insurance recovery of tornado damages	29,120	30%	8,736	20,384
m. Correction of overstatement of prior year’s sale	-16,000	30%	-4,800	-11,200
n. Gain on sale of discontinued segment’s assets	34,000	30%	10,200	23,800

Conclusion:

The total income tax effect is $8,661 and total income post tax amount is $20,209

Conclusion

There is Income from discontinued segment of $11,025 for the year 2015

Requirement 2

To determine

To Prepare:

The Net income from continuing operations before and after tax expense

Answer to Problem 6APSA

Solution:

The Net income from continuing operations before and after tax expense is given below

Olinda corporation
Income statement ($)
For the year ended December 31,2015
k.	Net sales		998,500
a	Interest revenue		14,000
g.	Gain from settling lawsuit		44,000
	Total revenues and gains		1,056,500
q	Cost of goods sold	482,500
b	Depreciation expense—Equipment	34,000
i.	Depreciation expense—Buildings	52,000
e	Other operating expenses	106,400
c	Loss on sale of equipment	25,850
o	Loss from settling lawsuit	23,750
	Total expenses and losses		724,500
	Income from continuing operations before taxes		332,000
p	Income taxes expense (30%)		99,600
	Income from continuing operations after taxes		232,400

Explanation of Solution

Only those items which impact the income statement are taken the revenue and expanses of continuing operations are. The income from continuing operations are calculated as below

• The total revenues and gains are first calculated which includes net sales , interest revenue and gain from settling law suit
• Next the total expenses and losses related to continuing operations is calculated
• The income from continuing operations before income tax is calculated by following equation

  $\begin{array}{l}\text{Income from continuing operations before tax = Total revenue and gains - total expenses and losses}\\ \text{Income from continuing operations before tax = \$}1,056,500\text{ - \$}724,500\\ \text{Income from continuing operations before tax =} \$ 332,000\end{array}$

• The income tax rate is given 30%. the income tax expenses is calculated below
$\begin{array}{l}\text{Income tax expense = income from continuing operations before income tax x income tax rate}\\ \text{Income tax expense = }\$ 332,000\text{ x 30\%}\\ \text{Income tax expense = }\$ 99,600\end{array}$

• The income from continuing operations is calculated below
$\begin{array}{l}\text{Income from continuing operations = income from continuing operations before }\\ \text{income tax - Income tax expense}\\ \text{Income from continuing operations = \$} 332,000-\$ 99,600\\ \text{Income from continuing operations = \$} 232,400\\ \end{array}$

Conclusion:

The income from continuing operations before income tax is $ 332,000, the income tax expense is $ 99,600 and income from continuing operations is $232,400

Conclusion

There is Income from discontinued segment of $11,025 for the year 2015

Requirement 2

To determine

To Prepare:

The Net income from continuing operations before and after tax expense

Answer to Problem 6APSA

Solution:

The Net income from continuing operations before and after tax expense is given below

Olinda corporation
Income statement ($)
For the year ended December 31,2015
k.	Net sales		998,500
a	Interest revenue		14,000
g.	Gain from settling lawsuit		44,000
	Total revenues and gains		1,056,500
q	Cost of goods sold	482,500
b	Depreciation expense—Equipment	34,000
i.	Depreciation expense—Buildings	52,000
e	Other operating expenses	106,400
c	Loss on sale of equipment	25,850
o	Loss from settling lawsuit	23,750
	Total expenses and losses		724,500
	Income from continuing operations before taxes		332,000
p	Income taxes expense (30%)		99,600
	Income from continuing operations after taxes		232,400

Explanation of Solution

Only those items which impact the income statement are taken the revenue and expanses of continuing operations are. The income from continuing operations are calculated as below

• The total revenues and gains are first calculated which includes net sales , interest revenue and gain from settling law suit
• Next the total expenses and losses related to continuing operations is calculated
• The income from continuing operations before income tax is calculated by following equation

  $\begin{array}{l}\text{Income from continuing operations before tax = Total revenue and gains - total expenses and losses}\\ \text{Income from continuing operations before tax = \$}1,056,500\text{ - \$}724,500\\ \text{Income from continuing operations before tax =} \$ 332,000\end{array}$

• The income tax rate is given 30%. the income tax expenses is calculated below
$\begin{array}{l}\text{Income tax expense = income from continuing operations before income tax x income tax rate}\\ \text{Income tax expense = }\$ 332,000\text{ x 30\%}\\ \text{Income tax expense = }\$ 99,600\end{array}$

• The income from continuing operations is calculated below
$\begin{array}{l}\text{Income from continuing operations = income from continuing operations before }\\ \text{income tax - Income tax expense}\\ \text{Income from continuing operations = \$} 332,000-\$ 99,600\\ \text{Income from continuing operations = \$} 232,400\\ \end{array}$

Conclusion:

The income from continuing operations before income tax is $ 332,000, the income tax expense is $ 99,600 and income from continuing operations is $232,400

Requirement 3

To determine

To Prepare:

The after income tax income (loss) from discontinued segment

Answer to Problem 6APSA

Solution:

The after income tax income (loss) from discontinued segment is given below

After tax income from discontinued segment (debits or losses is shown in negative amount
Particulars	Amount($)
l. Loss from operating a discontinued segment (after Tax)	-12,775
n. Gain on sale of discontinued segment’s assets (after tax)	23,800
Income from discontinued segment	11,025

Explanation of Solution

The items which will be taken for calculating income after income tax income (loss) from discontinued segment are only related to discontinued segment which is given below

• Loss from operating a discontinued segment (After Tax) is $12,775 calculated in requirement 1
• Gain on sale of discontinued segment’s assets (after tax) is $23,800 calculated in requirement 1

The total of both items above will show the Income from discontinued segment

Conclusion

There is Income from discontinued segment of $11,025 for the year 2015

Requirement 4

To determine

To Prepare:

Income before extraordinary items

Answer to Problem 6APSA

Solution:

The income before extraordinary items is calculated below

Income before extraordinary items (losses is shown in negative amount)
Particulars	Amount($)
Income from continuing operations after taxes	232,400
Income from discontinued segment	11,025
Income before extraordinary items	243,425

Explanation of Solution

The items which will be taken for calculating income before extraordinary items which is given below

• Income from continuing operations after taxes is $232,400 calculated in requirement 2

• Income from discontinued segment is $11,025 calculated in requirement 3

The total of both items above will show the income before extraordinary items

Conclusion

There is income before extraordinary items of $243,425 for the year 2015

Requirement 5

To determine

To Prepare:

Net income for the year 2015

Answer to Problem 6APSA

Solution:

The Net income is as under

Net income (losses is shown in negative amount)
Particulars	Amount($)
Income before extraordinary items	243,425
Extra ordinary item
j Gain on insurance recovery of tornado damages (after tax)	20,384
Net income	263,809

Explanation of Solution

The items which will be taken for Net income which is given below

• Income before extraordinary items is $243,425 calculated in requirement 4
• Gain on insurance recovery of tornado damages (after tax)is $20,384 calculated in requirement 1

The total of both items above will show the Net income

Conclusion

The Net income is $263,809 for the year 2015