Question

The pretax financial income (or loss) figures for Jenny Spangler Company are as follows:

2012- $160,000

2013- 250,000

2014- 80,000

2015- 160,000

2016- 380,000

2017- 120,000

2018- 100,000

Pretax financial income (or loss) and taxable income (loss) were the same for all the given years. Assume a 45% tax rate for 2012 and 2013, and a 40% tax rate for the remaining years. Instructions (a) Prepare the journal entries for the years 2014 to 2018 to record the income tax expense and effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company using the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)

Short answer

Carryback provisionis a type of income tax offsetting provision thatan organization maintains so that the net operating lossof the firm can be adjusted through the previous year's tax expense, resulting in decreasing the total taxamount.

Step-by-step solution

Introduction

The organization will pay the income tax expense of each year. If a company incurs a net operating loss in a year, the tax expense can be adjusted by balancing the amount from the previous operating profit.

Recording of the journal entries

Date	Particulars	Debit	Credit
2014	Income tax expense$\left(\$80,000\times 40\%\right)$	$32,000
	Income tax payable		$32,000
	(To record the income tax)
2015	Income tax refund receivables $\left(\$160,000\times 40\%\right)$	$64,000
	Benefit due to loss carryback		$64,000
	(To record the loss carryback)
2016	Income tax refund receivable $\left(\$80,000\times 40\%\right)$	$32,000
	Benefit due to loss carryback		$32,000
	(To record the carryback loss)
2016	Deferred tax asset $\left(\left(\$380,000-\$80,000\right)\times 40\%\right)$	$120,000
	Benefit due to loss carryback		$120,000
	(To record the deferred tax asset)
2017	Income tax expense$\left(\$120,000\times 40\%\right)$	$48,000
	Deferred tax asset		$48,000
	(To record the deferred tax asset)
2018	Income tax expense$\left(\$100,000\times 40\%\right)$	$40,000
	Deferred tax asset		$40,000
	(To record the tax expense)