Question

ina 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.)

Year		Pretax Income (Loss)			Tax Rate
2015		$118,000			34	%
2016		90,000			34	%
2017		(296,000	)		38	%
2018		229,000			38	%

The tax rates listed were all enacted by the beginning of 2015.

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.

Answer 1

Year	Account Tittles and Explanations	Debit ($)	Credit ($)
2015	Income Tax Expense A/c	40,120
	To Income Tax Payable A/c		40,120
	[Journal Entry to record the Income Tax Payable for the year 2015, $118,000 x 34%]
2016	Income Tax Expense A/c	30,600
	To Income Tax Payable A/c		30,600
	[Journal Entry to record the Income Tax Payable for the year 2016, $90,000 x 34%]
2017	Income Tax Refund Receivable A/c	70,720
	Deferred Tax Asset A/c	33,440
	To Benefit Due to Loss Carry Back A/c [($118,000 + 90,000) x 34%]		70,720
	To Benefit Due to Loss Carry forward A/c [($296,000 -118,000 – 90,000) x 38%]		33,440
	[Entry to record the Deferred Tax Assets and the Income Tax Refund Receivable]
2018	Income Tax Expense A/c [$229,000 x 38%]	87,020
	To Income Tax Payable A/c [$87,020 – 33,440]		53,580
	To Deferred Tax Asset A/c		33,440
	[Entry to record the Income Tax Expense for the year 2018 and the Adjustment for the Deferred Tax Assets]