Question

Selected account balances from the adjusted trial balance for Olinda Corporation as of its calendar yearend December 31, 2017, follow.

a. Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \( 14,000

b. Depreciation expense—Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \) 34,000

c. Loss on sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,850

d. Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000

e. Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,400

f. Accumulated depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,600

g. Gain from settlement of lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,000

h. Accumulated depreciation—Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,500

i. Loss from operating a discontinued segment (pretax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,250

j. Gain on insurance recovery of tornado damage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000

k. Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 998,000

l. Depreciation expense—Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000

m. Correction of overstatement of prior year’s sales (pretax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000

n. Gain on sale of discontinued segment’s assets (pretax) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000

o. Loss from settlement of lawsuit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,250

p. Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?

q. Cost of goods sold............................................................... 482,500

Required

Answer each of the following questions by providing supporting computations.

1. Assume that the company’s income tax rate is 30% for all items. Identify the tax effects and after-tax amounts of the three items labeledpretax.

Short answer

The after-tax amounts for loss from the discontinued segment, correction of overstatement sales, and gain on sales of discontinued segments are $12,775, $11,200, and $23,800

Step-by-step solution

Meaning of Pre-tax Gains or Losses

Pre-tax gains or losses refer to the amounts made before tax calculations and the tax payment.

Computation of tax effect and after-tax amounts

Particulars	Pre-Tax ($)	Tax Effect @30% ($)	After-tax ($)
Loss from operating a discounted segment	$18,250	$5,475	$12,775
Correction of over-statement of prior years’ sales	$16,000	$4,800	$11,200
Gain on sale of discounted segment’s assets	$34,000	$(10,200)	$23,800

Formula used to calculate after-tax amounts

$\mathbf{After}\mathbf{ }\mathbf{tax}\mathbf{=}\mathbf{Pretax}\mathbf{-}\left(\mathrm{Pretax}\times 30\%\right)$