Question

Sophie's Dog Supplies has income before taxes of $550,000 and an extraordinary loss of

$170,000. If the income tax rate is 30% on all items, the income statement should show
income before irregular items and an extraordinary loss, respectively, of
A) $550,000 and ($170,000).
B) $385,000 and ($86,700).
C) $385,000 and ($119,000).
D) $165,000 and ($51,000).

Answer 1

Sophie's Dog Supplies' income statement should reflect an income before irregular items of $550,000 and an extraordinary loss of ($119,000) after considering a 30% tax rate on the extraordinary loss.

Step-by-step explanation:

The question relates to how income before taxes and extraordinary loss should be reported on an income statement given a certain tax rate. Sophie's Dog Supplies has income before taxes of $550,000 and an extraordinary loss of $170,000. Since the income tax rate is 30% on all items, we need to calculate the tax effect on both the income and the extraordinary loss.

The income before irregular items is not affected by the extraordinary loss and remains at $550,000. To find the net effect of the extraordinary loss, we calculate 30% of $170,000, which is $51,000. Then we subtract this from the total extraordinary loss to find its after-tax amount:

• Extraordinary loss (before tax): $170,000
• Tax on extraordinary loss (30% of $170,000): $51,000
• Extraordinary loss (after tax): $170,000 - $51,000 = $119,000

Therefore, the income statement should show income before irregular items as $550,000 and the after-tax extraordinary loss as ($119,000).