Question

Wynn Sheet Metal reported a net operating loss of $138,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 30%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

	Taxable Income			Tax Rates			Income Taxes Paid
2014	$	79,000		20	%		$	15,800
2015		89,000		20				17,800
2016		99,000		30				29,700
2017		79,000		40				31,600

Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. Wynn elects the carryback option.
2. Show the lower portion of the 2018 income statement that reports the income tax benefit of the net operating loss.

Answer 1

Part 1

Net Operating Loss of $138,000 will be set off against the profits of the previous 2 years, being 2016 and 2017.

Amount to be utilized and tax benefit

Year 2016: $ 29700 ($99,000 * 30%)

Year 2017: $15600 ($39000 * 30%)

Total tax benefit/refund admissible = $ 45300

Journal Entry

Income Tax refund receivable A/c Dr. $45300

To Income Tax Expense $45300

Part 2

Net income = Earnings before tax - Tax Expense

For Year 2018, Net Income = -138000 - (-45300)

Thus, Net Loss for the year 2018 turns out to be $ 92700