Question

Sandhill Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.)

Year		Pretax Income (Loss)			Tax Rate
2015		$121,000			40	%
2016		93,000			40	%
2017		(287,000	)		45	%
2018		129,000			45	%

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

Prepare the journal entries for years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Prepare the income tax section of the 2018 income statement beginning with the line “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Date	Journal Entries	Debit($)	Credit ($)
2015	Income Tax Expense	48,400
	Income Tax Payable ($121,000 X 40%)		48,400
	(To record income tax expense)
2016	Income Tax Expense	37,200
	Income Tax Payable (93,000*40%)		37,200
	(To record income tax expense)
2017	Income Tax Refund Receivable	85,600
	Deferred Tax Asset	32,850
	Benefit Due to Loss Carryback (48400+37200)		85,600
	Benefit Due to Loss Carry forward (287,000-121,000-93,000) *45%		32,850
	(To record deferred tax asset and income tax refundable)
	Benefit Due to Loss Carryforward	16,425
	Allowance to Reduce Deferred Tax Asset (32850*50%)		16,425
	(To adjust one-half allowance of deferred tax asset)
2018	Income Tax Expense (129,000*45%)	58,050
	Deferred Tax Asset		32,850
	Income Tax Payable (Balancing fig)		25,200
	(To record income tax expense)
	Allowance to Reduce Deferred Tax Asset	16,425
	Benefit Due to Loss Carryforward		16,425
	(To adjust allowance as deferred tax asset has been used fully)

Income tax Section for 2017

Operating loss before income taxes		(287000)
Add: Income tax benefit
Benefit Due to Loss Carryback (48,400+37,200)	85,600
Benefit Due to Loss Carryforward	16,425	102,025
Net loss		($ 184,975)

Income tax section for 2018

Income before income taxes		$ 129,000
Income Tax Expense:
Current tax	25,200
Deferred tax	32,850
Benefit Due to Loss Carryforward	(16,425)	41,625
Net income		$ 87,375

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