Tax on nonordinary items. Richardson Company reported pretax income from continuing operations in the first six months of the current year in the amount of $100,000. Projected pretax operating income for the balance of the year is $110,000.
Estimates of annual income include income from municipal bonds in the amount of $5,000 that will never be subject to income tax. Furthermore, it is anticipated that $8,000 of tax credits will be available during the year.
During the third quarter of the current year, the company changed accounting principles that after retrospective application, resulted in pretax income for the first six months increasing by $20,000 and projections for the balance of the year increasing by $25,000. During the third quarter of the current year, the company experienced pretax operating income of $80,000 and projected a pretax operating income of $20,000 for the fourth quarter. At the end of the third quarter, the company estimated that annual income from municipal bonds would be $4,000 and the annual tax credit would only be $5,000. During the third quarter, the company also experienced a nonordinary loss of $40,000 and a nonordinary gain of $60,000.
Statutory income tax rates are 10% on the first $50,000 of income, 20% on the next $50,000 of income, 30% on the next $50,000 of income, 40% on the next $50,000 of income, and 35% on all remaining income.
1. Determine the impact on tax expense for the first six months of the current year as a result of the change in accounting principle.
2. Determine the tax expense or benefit traceable to the two nonordinary items.