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E19-23 (LO3) (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.) Year 2015 2016 2017 2018 Pretax Income (Loss) $120,000 90,000 (280,000) 220,000 Tax Rate 34% 34 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 (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line the loss carryforward are judged more likely than not to be realized in the future Operating loss before income taxes. than not that one-fourth of the benefits of the loss carryforward will not be realized. “Operating loss before income taxes.”
Expert Answer
(a) 2015
Income Tax Expense………………………………………….. 40,800
Income Tax Payable ($120,000 X 34%)……….. 40,800
2016
Income Tax Expense………………………………………….. 30,600
Income Tax Payable ($90,000 X 34%)…………. 30,600
2017
Income Tax Refund Receivable………………………. 71,400
Deferred Tax Asset………………………………………….. 26,600
Benefit Due to Loss Carryback………………… 71,400**
Benefit Due to Loss Carryforward……………. 26,600**
**[34% X $(120,000)] + [34% X $(90,000)] = $71,400
**38% X ($280,000 – $120,000 – $90,000) = $26,600
2018
Income Tax Expense……………………………………….. 83,600
Income Tax Payable…………………………………. 57,000*
Deferred Tax Asset…………………………………… 26,600
*[($220,000 – $70,000) X 38%]
(b) Operating loss before income taxes $(280,000)
Income tax benefit
Benefit due to loss carryback $71,400
Benefit due to loss carryforward 26,600 98,000
Net loss $(182,000)
(c) 2016
Income Tax Refund Receivable………………………. 71,400
Deferred Tax Asset………………………………………….. 26,600
Benefit Due to Loss Carryback………………… 71,400*
Benefit Due to Loss Carryforward……………. 26,600**
**[34% X $(120,000)] + [34% X $(90,000)] = $71,400
**38% X ($280,000 – $120,000 – $90,000) = $26,600
Benefit Due to Loss Carryforward…………………… 6,650
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value……………….. 6,650
(25% X $26,600)
2017
Income Tax Expense………………………………………….. 83,600
Deferred Tax Asset……………………………………… 26,600
Income Tax Payable…………………………………….. 57,000
[($220,000 – $70,000) X 38%]
Allowance to Reduce Deferred Tax Asset
to Expected Realizable Value…………………………. 6,650
Benefit Due to Loss Carryforward……………….. 6,650
(d) Operating loss before income taxes $(280,000)
Income tax benefit
Benefit due to loss carryback $71,400
Benefit due to loss carryforward 19,950 91,350
Net loss $(188,650)
Note: Using the assumption in part (a), the income tax section of the 2017 income statement would appear as follows:
Income before income taxes $220,000
Income tax expense
Current $57,000
Deferred 26,600 83,600
Net income $136,400
Note: Using the assumption in part (c), the income tax section of the 2017 income statement would appear as follows:
Income before income taxes $220,000
Income tax expense
Current $57,000
Deferred 26,600
Benefit due to loss carry-
forward (6,650) 76,950
Net income $143,050
