Question

Selected account balances from the adjusted trial balance for Harbor Corp. as of its calendar year-end December 31, 2017, follow.

No	Particular	Debit	Credit
a	Accumulated depreciation – building		\(400,000
b	Interest revenue		20,000
c	Net sales		2,640,000
d	Income tax expenses	\)?
e	Loss on hurricane damage	48,000
f	Accumulated depreciation – equipment		220,000
g	Other operating expenses	328,000
h	Depreciation expenses – equipment	100,000
i	Loss from settlement of lawsuit	36,000
j	Gain from settlement of lawsuit		68,000
k	Loss on sale of equipment	24,000
l	Loss from operating a discontinued segment (pre-tax)	120,000
m	Depreciation expenses – Building	156,000
n	Correction of overstatement of prior year’s expenses (pretax)		48,000
o	Cost of goods sold	1,040,000
p	Loss on sale of discontinued segment’s assets (pretax)	180,000
q	Account payable		132,000

Required

Answer each of the following questions by providing supporting computations.

1. Assume that the company’s income tax rate is 25% for all items. Identify the tax effects and after-tax amounts of the three items labeledpretax.

2. What is the amount of income from continuing operations before income taxes? What is the amount of income taxes expense? What is the amount of income from continuing operations?

3. What is the total amount of after-tax income (loss) associated with the discontinued segment?

4. What is the amount of net income for the year?

Short answer

1. Tax effect:

Item	After-tax
Loss from operating a discontinued segment (pre-tax)	$90,000
Correction of overstatement of prior year’s expenses (pre-tax)	$36,000
Loss on sale of discontinued segment’s assets (pre-tax)	$135,000

2. Income from the continuing operation is$759,000, Income from continuing operation before tax: $1,012,000 and income tax expenses are $253,000.

3. After-tax loss with discontinued segment:($225,000)

4. Net income: $522,000

Step-by-step solution

Definition of Net Income

Net income can be defined as the financial measure reflecting the benefits generated by the business entity from revenue after allocating all the expenses incurred. It is reported at the bottom line of the income statement.

Tax effect and after-tax amount of pre-tax items

Item	Pre-tax	25% tax	After-tax
Loss from operating a discontinued segment (pre-tax)	($120,000)	($30,000)	$90,000
Correction of overstatement of prior year’s expenses (pre-tax)	$48,000	$12,000	$36,000
Loss on sale of discontinued segment’s assets (pre-tax)	($180,000)	($45,000)	$135,000

Calculation of income from operations

Particular	Amount $	Amount $
Net sales		$2,640,000
Less: Cost of goods sold		(1,040,000)
Gross profit		1,600,000
Operating expenses
Depreciation expenses – equipment	(100,000)
Depreciation expenses – building	(156,000)
Other operating expenses	(328,000)
Total operating expenses		(584,000)
Operating income		1,016,000
Other revenue/expenses
Interest revenue		20,000
Loss from sale of equipment		(24,000)
Income from continuing operation before tax		$1,012,000
Less: Income tax expenses @ 25%		(253,000)
Income from operation after tax		$759,000

Income or loss from discontinued segment

Particular	Amount $
Loss from sale of assets of discontinued operations	$180,000
loss from operating a discontinued business segment	120,000
Total loss	$300,000
Less: Income tax @ 25%	(75,000)
After-tax loss	($225,000)

Amount of net income

Particular	Amount $
Total income from continued operation after tax	$759,000
After tax loss from discontinued operations	(225,000)
Less: Income tax on overstatement of expenses	(12,000)
Net income	$522,000