Question

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 2015–2018 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 “Operating loss before income taxes.” (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 “Operating loss before income taxes.”

Short answer

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

(a) Recording of the transaction in the journal book

Date	Particulars	Debit	Credit
2015	Income tax expense $\left(\$120,000\times 34\%\right)$	$40,800
	Income tax payable		$40,800
	(To record the tax)
2017	Income tax refund receivables $\left[\left(\$120,000\times 34\%\right)+\left(\$90,000\times 34\%\right)\right]$	$71,400
	Deferred tax asset $\left[\left(\$280,000-\$120,000-\$90,000\right)\times 38\%\right]$	$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 $\left(\left(\$220,000-\$70,000\right)\times 38\%\right)$		$57,000
	Deferred tax asset		$26,600
	(To record the deferred tax asset)

(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)

(c) Journal entry

Date	Particulars	Debit	Credit
2016	Income tax refund receivables $\left[\left(\$120,000\times 34\%\right)+\left(\$90,000\times 34\%\right)\right]$	$71,400
	Deferred tax asset $\left[\left(\$280,000-\$120,000-\$90,000\right)\times 38\%\right]$	$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 $\left(\$26,600\times 25\%\right)$		$6,650
	(To record the allowance)
2017	Income tax expense	$83,600
	Income tax payable $\left(\left(\$220,000-\$70,000\right)\times 38\%\right)$		$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 $\left(\$26,600\times 25\%\right)$		$6,650
	(To record the allowance)

(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