Question

Tobac Company reported an operating loss of $133,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40% for 2018 and all future years. Assume that Tobac elects a loss carryback. No valuation allowance is needed for any deferred tax assets. Taxable income, tax rates, and income taxes paid in Tobac's first four years of operations were as follows: Taxable income Tax rates Taxes paid 2014 $ 31,000 30 % $ 9,300 2015 $ 36,000 30 % $ 10,800 2016 $ 43,000 35 % $ 15,050 2017 $ 41,000 40 % $ 16,400 Required: 1. Prepare a compound journal entry to record Tobac’s tax provision for the year 2018. 2. Compute Tobac's net loss for 2018.

Answer 1

1) The loss carryback can be allowed for previous two years (i.e. 2016 and 2017 in this case). Firstly we need to calculate deferred tax asset due to loss in 2018 and tax refunds for 2016 and 2017. The required calculations are shown as follows:-

	2016 (Past)	2017 (Past)	2018 (Current)
Operating Loss			(133,000)
Carryback Forward (A)	43,000	41,000	84,000
Loss to be carry forward (B)			(49,000)
Tax rate (C)	35%	40%	40%
Tax refund (A*C)	15,050	16,400
Deferred Tax Asset (B*C)			19,600

The compound Journal Entry to record tax for 2018 is shown as follows:- (Amounts in $)

Account Titles	Debit	Credit
Tax Refundable (15,050+16,400)	31,450
Deferred Tax Asset	19,600
Tax Benefit due to Loss (31,450+19,600)		51,050
(To record the tax provision for 2018)

2) Tobac's Net Loss for 2018 = Total Loss for 2018 - Tax benefit due to loss

= $133,000 - $51,050 = $81,950

Therefore Tobac's net loss for 2018 is $81,950.