Question

Arreaga Corp. has a tax rate of 20 percent and income before non-operating items of $1,392,000. It also has the following items (gross amounts).

Unusual loss $222,000
Discontinued operations loss 606,000
Gain on disposal of equipment 48,000
Change in accounting principle
increasing prior year's income 318,000
What is the amount of income tax expense Arreaga would report on its income statement?
a. $278,400
b. $243,600
c. $297,600
d. $186,000

Answer 1

The income tax expense for Arreaga Corp. is calculated by first determining the taxable income after accounting for all the given items, which results in a taxable income of $930,000. Applying the 20% tax rate yields an income tax expense of $186,000.

Step-by-step explanation:

The calculation of income tax expense for Arreaga Corp. would consider the income before non-operating items and all other given items that affect taxable income. Given a tax rate of 20 percent, we should apply this rate to the income after considering the unusual loss, discontinued operations, gain on disposal of equipment, and the change in accounting principle.

• Income before non-operating items: $1,392,000
• Unusual loss: -$222,000
• Discontinued operations loss: -$606,000
• Gain on disposal of equipment: +$48,000
• Change in accounting principle (increase prior year's income): +$318,000

The taxable income is calculated as follows:

$1,392,000 (income before non-operating items) - $222,000 (unusual loss) - $606,000 (discontinued operations loss) + $48,000 (gain on disposal) + $318,000 (change in accounting principle) = $930,000 (taxable income)

Now, applying the 20% tax rate:

$930,000 x 0.20 = $186,000 (income tax expense)

Therefore, the income tax expense that Arreaga would report on its income statement is $186,000.