Question

Meyer reported the following pretax financial income (loss) for the years 2015–2019. 2015 $240,000 2016 350,000 2017 120,000 2018 (570,000) 2019 180,000 Pretax financial income (loss) and taxable income (loss) were the same for all the years involved. The enacted tax rate was 34% for 2015 and 2016, and 40% for 2017–2019. Assume the carryback provision is used for the net operating losses. Instructions (a) Prepare the journal entries for the years 2017–2019 to record the income tax expense, 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-fifth of the benefits of the loss carryforward will not be realized. (b) Prepare the income tax section of the 2018 income statement beginning with the line “Income (loss) before income taxes.”

Short answer

Taxable income is the amount of income of an organization on which the government will impose the tax. It is calculated by deducting the necessary deductions under the tax regime.

Step-by-step solution

(a) Journal Entries

Date	Particulars	Debit	Credit
2017	Income tax expense$\left(\$120,000\times 40\%\right)$	$48,000
	Income tax payable		$48,000
	(To record the tax expense)
2018	Income tax refund receivables $\left(\$350,000\times 34\%+\left(\$120,000\times 40\%\right)\right)$	$167,000
	Deferred tax asset $\left(\left(\$570,000-\$350,000-\$120,000\right)\times 40\%\right)$	$40,000
	Benefit due to loss carryback		$167,000
	Benefit due to loss carryforward		$40,000
	(To record the loss)
2018	Benefit due to loss carryforward$\left(\frac{\$40,000}{5}\right)$	$8,000
	Allowance to reduce deferred tax asset to expected realizable value		$8,000
	(To record the allowance)
2019	Income tax expense	$72,000
	Income tax payable $\left(\$40,000-\$8,000\right)$		$32,000
	Deferred tax asset		$40,000
	(To record the tax payable)
2019	Allowance to reduce deferred tax asset to expected realizable value	$8,000
	Benefit due to loss carryforward		$8,000
	(To record the loss)

(b) Income tax section under the income statement

Income Statement
Particulars	Amount
Loss before income taxes	($570,000)
Less: Income tax benefit
Carryback	$167,000
Carryforward	$32,000
Net Loss	($371,000)