Question

Beilman Inc. reports the following pretax income (loss) for both book and tax purposes. (Assume the carryback provision is used where possible for a net operating loss.) Year Pretax Income (Loss) Tax Rate 2015 $120,000 40% 2016 90,000 40 2017 (280,000) 45 2018 120,000 45 The tax rates listed were all enacted by the beginning of 2015.Instructions (a) Prepare the journal entries for years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carryforward will not be realized. (b) Prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the income tax section of the 2018 income statement beginning with the line “Income before income taxes.”

Short answer

Income before income taxes is the first head under an organization's financial statement of income. It includes the amount a business earns before deducting the amount of tax expense.

Step-by-step solution

(a) Journal entry

Date	Particulars	Debit	Credit
2015	Income tax expense $\left(\$120,000\times 40\%\right)$	$48,000
	Income tax payable		$48,000
	(To record the income tax)
2016	Income tax expense $\left(\$90,000\times 40\%\right)$	$36,000
	Income tax payable		$36,000
	(To record the income tax)
2017	Income tax refund receivables $\left(\$48,000+\$36,000\right)$	$84,000
	Benefit due to loss carryback		$84,000
	(To record the loss carryback)
2017	Deferred tax asset $\left[\left(\$280,000-\left(\$120,000-\$90,000\right)\right)\times 45\%\right]$	$31,500
	Benefit due to loss carryforward		$31,500
	(To record the loss carryforward)
2017	Benefit due to loss carryforward $\left(\left(\$70,000\times 45\%\right)\times 50\%\right)$	$15,750
	Allowance to reduce the deferred tax asset to expected realizable value		$15,750
	(To record the loss carryforward)
2018	Income tax expense	$54,000
	Income tax payable $\left(\left(\$120,000-\$70,000\right)\times 45\%\right)$		$22,500
	Deferred tax asset		$31,500
	(To record the tax)
2018	Allowance to reduce deferred tax asset	$15,750
	Benefit due to loss carryforward		$15,750
	(To record the allowance)

(b) Income statement

Income statement for 2017
Particulars	Amount
Operating loss before income taxes	($280,000)
Add: Income tax benefit
Benefit due to loss carryback	$84,000
Benefit duet to loss carryforward	$31,500
Net Loss	($164,500)

(c) Preparation of the income tax section

Income statement for 2018
Particulars	Amount
Income before income tax	$120,000
Less: Income tax expense
Current tax	$22,500
Deferred tax	$31,500
Benefit due to loss carryforward	($15,750)
Net Profit	$81,750