At the beginning of 2007 Norris Company had a deferred tax liability of $6,400, because of the use of MACRS depreciation for income tax purposes and units-of-production depreciation for financial reporting.
The income tax rate is 30% for 2006 and 2007, but in 2006 Congress enacted a 40% tax rate for 2008 and future years. The accounting records of the Norris Company show the following pretax items of financial income for 2007: income from continuing operations, $120,000 (revenues of $352,000 and expenses of $232,000); gain on disposal of Division F, $23,000; extraordinary loss, $18,000; loss from operations of discontinued Division F, $10,000; and prior period adjustment, $15,000, due to an error that understated revenue in 2006. All of these items are taxable; however, financial depreciation for 2007 on assets related to continuing operations exceeds tax depreciation by $5,000. The company had a retained earnings balance of $161,000 on January 1, 2007 and declared and paid cash dividends of $32,000 during 2007.
Required
1. Prepare the income tax journal entry of the Norris Company at the end of 2007.
2. Prepare Norris Company’s 2007 income statement.
3. Prepare Norris Company’s 2007 statement of retained earnings.
4. Show the related income tax disclosures on the Norris Company’s December 31, 2007 balance sheet.