Question

Problem 3: Belford Industries reported the following pretax income and losses over four years: Pretax Income (Loss) $19,000 ($50,000) $40,000 $60,000 Tax Rate Year 1 35% Year 2 30% 25% Year 3 Year 4 25% Prepare the journal entry to record income taxes in Year 2 and show the income statement presentation 1. of income taxes. Income Statement 2. Prepare the journal entry to record income taxes in Year 3 and show the income statement presentation of income taxes Income Statement

Answer 1

Year 2

(i) Tax Assets Dr. 15,000

To Income tax expense/(credit) Cr. 15,000

(Being tax saving recognized on loss assuming losses can be set off with future incomes calculated at 50,000*30%)

Income statement (Amount in $)

Particulars	(Amount in $)
Profit/(Loss) before tax (1)	(50,000)
Tax Expense/(Saving) (2)	(15,000)
Profit/(Loss) after tax (1-2)	(35,000)

Year 3

(ii) Income tax expense Dr. 12,500

To Tax Assets Cr. 12,500

(Being tax expense recognized on utilization of loss of Year 2 as follows= Opening tax asset (50,000*30%)- closing tax asset (10,000*25%)= tax expense $12,500)

Income statement

Income statement (Amount in $) Particulars (Amount in $) Profit/(Loss) before tax (1) 40,000 Tax Expense/(Saving) (2) 12,500 Profit/(Loss) after tax (1-2) 27,500