Pretax financial income for 2010 and 2011 is shown below for Roost Inc 2010 2011

Question

Pretax financial income for 2010 and 2011 is shown below for Roost Inc 2010 2011 Net sales COGS 8,315,0009,109,000 7,381,000 1,728,000 867,000 45,000 906,000 115,000 120.000 786,000 6,736,000 1,579,000 834,000 500,000 245,000 Gross profit SG&A; expenses Cost of litigation Operating income Interest expense Pretax income 130,000 Roost's income tax rate is 35% and historically there have been no differences between book & tax for the accounting of Roost's revenues and expenses. However, the following difference dicd arise that affected both 2010 and 2011 In early 2010, a Roost delivery truck struck and killed a jaywalking pedestrian. The family of the victim sued Roost for S15 million in damages. Roost initially intended to fight the suit vigorously. However, new information surfaced late in 2010 that led the Roost defense team to adopt a more cautious stance. Ultimately, Roost expected to have to pay a significant settlement to resolve the suit. At 12/31/10, Roost accrued a $500,000 contingent loss representing its estimate of the probable settlement. . Roost actually did settle the suit in late 2011 for a slightly lower amount of $455,000 The excess $45,000 liability was reversed with a credit to expense in 2011. For tax purposes, legal settlements are not deductible until actually paid and for the actual amount. At both 12/31/10 and 12/31/11, prepare the necessary journal entries to record income tax expense and to adjust the related year-end balance sheet accounts. Describe how income tax expense will be reported on each year's income statement.

Explanation / Answer

Income tax expenses = Tax on pretax income + provision reversal for litigation

For 2010 Pretax income $130,000 Add: Cost of litigation $500,000 Taxable income $630,000 Tax @ 35% $220,500 Journal Entry Income tax expenses $45,500 Deferred tax expenses $175,000 Income tax payable $220,500 For 2011 Pretax Income $786,000 Less: Actual cost of settlement ($455,000) Taxable income $331,000 Tax @ 35% $115,850 Journal entry Income tax expenses $290,850 Deferred tax expenses $159,250 Deferred tax expenses (for provision reversal) $15,750 Income tax payable $115,850

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.