Howard Co.'s 2013 income from continuing operations before income taxes was $300,000. Howard Co. reported a before-tax extraordinary gain of $55,000. All tax items are subject to a 40% tax rate. In its income statement for 2013, Howard Co. would show the following line-item amounts for net income and income tax expense:

$245,000 and $278,000.
$355,000 and $322,000.
$213,000 and $120,000.
$120,000 and $213,000.

$120,000 and $213,000

Explanation:

Income tax expense is charged on the realized value of income. Net Income before tax is a realized value but the extraordinary gain of $55,000 is realized yet but a deferred tax will be deducted from it and recorded for future tax implication.

Income Tax Expense = $300,000 x 40% = $120,000

Net Income = $300,000 - 120,000 = $180,000

Extraordinary gain (after tax) = $55,000 x 60% = $33,000

Total Net Income = $180,000 + $33,000 = $213,000

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