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Chapter 19: 17Q (page 1093)

What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?

Short Answer

Expert verified

Net operating loss is the type of loss an organization suffers from its daily business activities. It depicts that the firm is not earning profits and finds difficulty rendering their expenditures.

Step by step solution

01

The possible treatment for tax purposes of a net operating loss

All of the organizations can adjust or reconcile their net operating loss in two provisions, i.e.,

(1) Loss carryback

(2) Loss carryforward

Loss carryback is often regarded as the most beneficial way to balance the amount of current net operating loss. The organization can divide the loss up to two previous years, and the amount of income tax expense paid will be refunded. Since no one knows how much tax rate will be implemented in the future, firms prefer to treat their operating loss as per the loss carryback provision to get money funds.

02

Treatment

As per the Financial Reporting purposes, firms using loss carryback can recognize their amount of operating loss in the year of loss. The loss arising from carryforward will be reported under the deferred tax asset. It means that the income tax authority will more likely not recognize the loss against the asset and be credited to the income tax expense section under the company's income statement.

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Most popular questions from this chapter

Use the information for Rode Inc. given in IFRS19-7. Assume that it is probable that the entire net operating loss carryforward will not be realized in future years. Prepare the journal entry(ies) necessary at the end of 2017.

Differentiate between an originating temporary difference and a reversing difference.

At December 31, 2017, Percheron Inc. had a deferred tax asset of \(30,000. At December 31, 2018, the deferred tax asset is \)59,000. The corporation鈥檚 2018 current tax expense is $61,000. What amount should Percheron report as total 2018 income tax expense?

Jennifer Capriati Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2016 due to a single cumulative temporary difference of \)375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of \(450,000. Taxable income for 2017 is \)820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.

The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.

Instructions (a) Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference, and explain why. (1) Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when paid. (2) Depreciation for book and income tax purposes differs because of different bases of carrying the related property, which was acquired in a trade-in. The different bases are a result of different rules used for book and tax purposes to compute the basis of property acquired in a trade-in. (3) A company properly uses the equity method to account for its 30% investment in another company. The investee pays dividends that are about 10% of its annual earnings. (4) A company reports a gain on an involuntary conversion of a nonmonetary asset to a monetary asset. The company elects to replace the property within the statutory period using the total proceeds so the gain is not reported on the current year鈥檚 tax return.
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