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Chapter 19: Q7IFRS (page 1114)

Rode Inc. incurred a net operating loss of \(500,000 in 2017. Combined income for 2015 and 2016 was \)350,000. The tax rate for all years is 40%. Rode elects the carryback option. Prepare the journal entries to record the benefits of the loss carryback and the loss carryforward.

Short Answer

Expert verified

Journal entries are recorded in Step 2

Step by step solution

01

Meaning of Income-tax

Income tax is additional surcharge payable on the total income generated by the entity, to the taxing authority.

02

Preparing journal entries

Deferred tax asset=(Operating loss−Combined income)×Tax rate=($500,000−$350,000)×40%=$150,000×40%=$60,000

Date

Particulars

Debit ($)

Credit ($)

Income tax refund receivable

140,000

Benefits due to loss carry back

140,000

Deferred tax asset

60,000

Benefits due to loss carry forward

60,000

Working notes:

Calculation of income tax refund receivable

Income tax refund receivable=Combined income×Tax rate=$350,000×40%=$140,000

Calculation of deferred tax asset

Deferred tax asset=(Operating loss−Combined income)×Tax rate=($500,000−$350,000)×40%=$150,000×40%=$60,000

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Most popular questions from this chapter

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared. Taxable Income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income \)163,000 \(213,000 \)93,000 Pretax Financial Income Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t recognized 24,000 –0– –0– Estimated cost of warranties (15,000) –0– –0– Income before taxes \)169,000 \(210,000 \)90,000. The tax rates in effect are 2016, 40%; 2017 and 2018, 45%. All tax rates were enacted into law on January 1, 2016. No deferred income taxes existed at the beginning of 2016. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016, 2017, and 2018.

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

Kleckner Company started operations in 2013. Although it has grown steadily, the company reported accumulatedoperating losses of \(450,000 in its first four years in business. In the most recent year (2017), Kleckner appears to haveturned the corner and reported modest taxable income of \)30,000. In addition to a deferred tax asset related to its net operatingloss, Kleckner has recorded a deferred tax asset related to product warranties and a deferred tax liability related to accelerateddepreciation. Given its past operating results, Kleckner has determined that it is not probable that it will realize any of thedeferred tax assets. However, given its improved performance, Kleckner management wonders whether there are any accountingconsequences for its deferred tax assets. They would like you to conduct some research on the accounting for recognitionof its deferred tax asset.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/).(Click on the IFRS tab and then register for freeeIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser torespond to the following questions. (Provide paragraph citations.)

(a)Briefl y explain to Kleckner management the importance of future taxable income as it relates to the recognition ofdeferred tax assets.

(b)What are the sources of income that may be relied upon in assessing realization of a deferred tax asset?

(c)What are tax-planning strategies? From the information provided, does it appear that Kleckner could employ a taxplanningstrategy in evaluating its deferred tax asset?

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Jennifer Capriati Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2016 due to a single cumulative temporary difference of \)375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of \(450,000. Taxable income for 2017 is \)820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. Instructions (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.
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