Question

I NEED CALCULATION/PROCESSES TO UNDERSTAND IT.

In 2018, its first year of operations, Company A has a $500,000 net operating loss when the tax rate is 35%.

Instructions:

1. Assume the management of Company A thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company. What are the entries in 2018 to record the tax loss carryforward?

Description	Debit	Credit

2. In 2019, Company A has $50,000 taxable income and the tax rate remains 35%. What entries would be made in 2019 to record the current and deferred income taxes and to recognize the loss carryforward?

Description	Debit	Credit

3. If this had not been a new company, how many years could the company carryback the loss?

Answer 1

Sol. a) Calculate the amount of deferred income asset by multiplying the operating loss of $500,000 with the rate of 35%.

= $500,000 x 35%

= $175.000

It is the taxable loss.

Deferred income assets is the asset account that is created on the assumption that company will earn sufficient profit to setoff the operating loss.

It is classified as non-current asset section of balance sheet.

Description	Debit	Credit
Deferred income asset	175,000
To Income statement		175,000

a) The taxable income of 2019 is $50,000.

Determine the current tax by multiplying the taxable income of $50,000 with the tax rate of 35%.

= 50,000 x 35%

= 17,500

The deferred income asset is $175,000

Description	Debit	Credit
Income statement	17,500
To Current tax		17,500
Deferred income asset	175,000
To Income statement		175,000

Current tax is the amount of tax to be payable for a period.

The entry of carry forward the loss remains same because the loss has not been set off in 2019 as it is the new company.

The tax rate remains same at 35%.

a) The company could carry back the loss up to five years from taxable years of 2018, 2019 and 2020.