Chapter 12, Problem 12.2P

To determine

Pre-tax loss:

Pre-tax loss is basically defined as the loss which is incurred before paying the income taxes.

Income tax expense is basically defined as an expense that the business has to pay during a particular accounting period.

To calculate:

The pre-tax loss and related tax expense for the first three-quarters of 2017for continuing and discontinued operations.

Answer to Problem 12.2P

Tax Benefit for Quarter 2 is $\$23040$ and for Quarter 3 is $\$27200$ .

Explanation of Solution

Tax expense (benefit) for the first three quarters is as follows:

Interim period (Owner)	Tape of income	Pre-tax income (loss)		Effective tax rate	Tax	expense (benefit) Previously reported an SI	Current period (in SI
		Current period lin SI	Year-to-date (in 5)		Year.,-Date (n 5)
First	Continuing operation	$\left(45000\right)$	$\left(45000\right)$	Refer note A	$\left(6400\right)$	-	$\left(6400\right)$
First - restated	Continuing operation	$\left(30000\right)$	$\left(30000\right)$	Refer note B	$\left(6400\right)$	-	$\left(6400\right)$
First - restated	Discontinued operation	$\left(15000\right)$	$\left(15000\right)$	Refer note B	-	-	-
Second	Continuing operation	$\left(58000\right)$	$28000$	26.44%	$7403$	$(6400)$	$13803$
Second	Discontinued operation	$\left(57000\right)$ Refer note C	$(72000)$	Refer working note A	$\left(23040\right)$	-	$\left(23040\right)$
Third	Continuing operation	$40000$	$68000$	24.73%	$16186$	$7403$	$9413$
Third	Discontinued operation	$\left(13000\right)$ Refer note C	$\left(85000\right)$	Refer working note B	$\left(27200\right)$	$\left(23040\right)$	$\left(4160\right)$

Note A:

Tax benefit can be estimated by summing the tax expense in the past 2 years -

  $=\left[\left(\$12000\times 30\%\right)+\left(\$10000\times 28\%\right)\right]$

Note B:

Tax benefit can be discovered by carrying the loss of $15,000 and tax credit in the past 2 years -

  $=\left[\left(\$12000\times 30\%\right)+\left(\$10000\times 28\%\right)+\$1960\right]$

Note C:

Pre-tax income (losses) of discontinued operations

  $\begin{array}{l}=\left[\text{Pre-tax operating losses}+\text{Gain form disposal of asset}-\text{Revised imprint losses}\right]\\ =\left(\$30000\right)+\$25000+\left(\$42000-\$34000\right)+\left(\$16000\right)\\ =\$13000\end{array}$

Note D:

Pre-tax income (losses) of discontinued operations

  $\begin{array}{l}=\left[\text{Pre-tax operating losses}+\text{Pre-tax impairment losses}\right]\\ =\$15000+\$42000\\ =\$57000\end{array}$

Working Note A.

Particulars	Ordinary income	All sources
Annual income (loss)	$90000$	$18000$
Annual net tax expense (benefit),$=\left[\left(\$18000\times 32\%\right)-\$5000\right]$	$23800$	$760$

Calculation of tax benefit associated with the discontinued operation - Quarter 2

  $\begin{array}{c}\text{Tax Benefit}=\left[\begin{array}{l}\text{Annual net tax benefit }\left(\text{ordinary income}\right)\\ \text{–Annual net tax benefit }\left(\text{all sources}\right)\end{array}\right]\\ =\$23,800-\$760\\ =\$23,040\end{array}$

  $\begin{array}{l}=\left[\text{Pre-tax operating losses}+\text{Gain form disposal of asset}-\text{Revised imprint losses}\right]\\ =\left(\$30000\right)+\$25000+\left(\$42000-\$34000\right)+\left(\$16000\right)\\ =\$13000\end{array}$

Working Note B.

Particulars	Ordinary income	All sources
Annual income (loss)	$110,000$	$25000$
Annual net tax expense (benefit)  $=\left[\left(\$25000\times 32\%\right)-\$8000\right]$	$27,200$	_

Calculation of tax benefit associated with the discontinued operation - Quarter 3:

  $\begin{array}{c}\text{Tax Benefit }=\left[\begin{array}{c}\text{Annual net tax benefit }\left(\text{ordinary income}\right)\\ -\text{Annual net tax benefit }\left(\text{All sources}\right)\end{array}\right]\\ =\$27,200-\$0\\ =\$27,200\end{array}$

  $\begin{array}{c}\text{ Fixeed Asset Turnover}=\frac{\text{Total Revenue}}{\text{Total Fixed Assets}}\times 100\\ =\frac{\$23,890,000}{\$18,230,00}\times 100\\ =1.31\%\end{array}$