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Chapter 19: Q23E. (page 1101)

SpamelaHamderson 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.) Income (Loss) Tax Rate 2009 \( 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45 Year Pretax Income (Loss) Tax Rate 2015 \)120,000 34% 2016 90,000 34 2017 (280,000) 38 2018 220,000 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015鈥�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 the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥� (c) 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. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line 鈥淥perating loss before income taxes.鈥�

Short Answer

Expert verified

Provision for loss is the type of monetary provision maintained by the organization to meet theuncertain loss condition faced by the company in the future. It is made to protect the firm against the occurrence of liability.

Step by step solution

01

(a) Recording of the transaction in the journal book

Date

Particulars

Debit

Credit

2015

Income tax expense ($120,000脳34%)

$40,800

Income tax payable

$40,800

(To record the tax)

2017

Income tax refund receivables

[$120,000脳34%+$90,000脳34%]

$71,400

Deferred tax asset

[$280,000-$120,000-$90,000脳38%]

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2018

Income tax expense

$83,600

Income tax payable

($220,000-$70,000脳38%)

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

02

(b) Income statement

Income Statement

Particulars

Amount

Operating loss before income taxes

($280,000)

Add: Income tax benefit

Carryback

$71,400

Carryforward

$26,600

Net Loss

($182,000)

03

(c) Journal entry

Date

Particulars

Debit

Credit

2016

Income tax refund receivables

[$120,000脳34%+$90,000脳34%]

$71,400

Deferred tax asset

[$280,000-$120,000-$90,000脳38%]

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2016

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset

($26,600脳25%)

$6,650

(To record the allowance)

2017

Income tax expense

$83,600

Income tax payable

($220,000-$70,000脳38%)

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

2017

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset ($26,600脳25%)

$6,650

(To record the allowance)

04

(d) Preparation of the statement

Income Statement

Particulars

Amount

Income before income taxes

4220,000

Add: Income tax expense

Current

$57,000

Deferred

$26,600

Benefit loss

($6,650)

Net Profit

$143,050

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Most popular questions from this chapter

Which of the following statements is correct with regard to IFRS and GAAP? (a) Under GAAP, all potential liabilities related to uncertain tax positions must be recognized. (b) The tax effects related to certain items are reported in equity under GAAP; under IFRS, the tax effects are charged or credited to income. (c) IFRS uses an affirmative judgment approach for deferred tax assets, whereas GAAP uses an impairment approach for deferred tax assets. (d) IFRS classifies deferred taxes based on the classification of the asset or liability to which it relates.

The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Pretax Taxable Year Financial Income Income Tax Rate 2017 \(290,000 \)180,000 35% 2018 320,000 225,000 40 2019 350,000 260,000 40 2020 420,000 560,000 40

Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2017. Instructions (a) Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 40% was not enacted until the beginning of 2018. (b) Prepare the income statement for 2018, beginning with Income before income taxes.

Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2017.

This year, Gumowski Company has each of the following items in its income statement. 1. Gross profits on installment sales. 2. Revenues on long-term construction contracts. 3. Estimated costs of product warranty contracts. 4. Premiums on officers鈥� life insurance policies with Gumowski as beneficiary. Instructions (a) Indicate where deferred income taxes are reported in the financial statements.

How are deferred tax assets and deferred tax liabilities reported on the balance sheet?
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