Question

( How should the income tax expense section UI E LUC I E19-23 (203) (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) Spamela Hamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Tax Rate 34% Year 2015 2016 2017 2018 Pretax Income (Loss) $120,000 90,000 (280,000) 220,000 38 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015-2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 Income statement beginning with the line "Operating loss before income taxes." (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line "Operating loss before income taxes."

Answer 1

Spamela Handerson Requirement a Journal Enteries Date Particulars 2015 Income Tax Expense a/c To Income Tax Payable 120000 x 34% Dr. Debit in $ Credit in $ 40800 40800 2016 Dr. 30600 Income Tax Expense a/c To Income Tax Payable 90000 x 34% 30600 2017 71400 26600 Income Tax Refund Receivable a/c Dr. Deferred Tax Asset a/c Dr. To Benefit Due to Loss Carryback To Benefit Due to Loss Carryforward [34% X $(120,000)] + [34% X $(90,000)] = $71,400 38% % ($280,000-$120,000 - $90,000) = $26,600 71400 26600 2018 Dr. 83600 Income Tax Expense a/c To Income Tax Payable To Deferred Tax Asset [($220,000 - $70,000) X 38%] 57000 26600 Requirement b -280000 Partial Income Statement for 2017 Operating loss before income taxes Income tax benefit Benefit due to loss carryback Benefit Due to Loss Carryforward Net loss 71400 26600 98000 -182000 Requirement Journal Enteries Date Particulars 2017 Income Tax Refund Receivable a/c Dr. Deferred Tax Asset a/c Dr. To Benefit Due to Loss Carryback To Benefit Due to Loss Carryforward (To record refund) Debit in $ Credit in $ 71400 26600 71400 26600 6650 Benefit Due to Loss Carryforward a/c Dr. To Allow. to Reduce DTA to Exp. Real. Value (To record allowance) 26600 / 4 6650 2018 Dr. 83600 Income Tax Expense a/c To Income Tax Payable To Deferred Tax Asset (To record tax expense) 57000 26600 6650 Allow. to Reduce DTA to Exp. Real. Value a/c Dr. To Benefit Due to Loss Carryforward (To adjust allowance) 6650 Requirement d -280000 Partial Income Statement for 2017 Operating loss before income taxes Income tax benefit Benefit due to loss carryback Benefit Due to Loss Carryforward Net loss 26600 - 6650 = 19950 71400 19950 91350 -188650