Question

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. Rode expects to return to profitability in 2018.

Short answer

Loss carryforwardis theopposite of loss carryback, wherethe operating loss earnedin thecurrent financial yeariscarried forwardto thenext financial yearof the organization.

Step-by-step solution

Computation of loss carryback and the loss carryforward.

$\begin{array}{rcl}\mathrm{Loss}\mathrm{Carryback}& =& \mathrm{Combined}\mathrm{Income}\times \mathrm{Tax}\mathrm{Rate}\\ & =& \$350,000\times 40\%\\ & =& \$140,000\end{array}$

$\begin{array}{rcl}\mathrm{Loss}\mathrm{Carry}\mathrm{forward}& =& (\mathrm{Net}\mathrm{operating}\mathrm{loss}-\mathrm{Combined}\mathrm{income})\times \mathrm{Tax}\mathrm{rate}\\ & =& (\$500,000-\$350,000)\times 40\%\\ & =& \$150,000\times 40\%\\ & =& \$60,000\end{array}$

Journal entry

Rode Inc.
Journal entry
Date	Particulars	Debit	Credit
2018	Income tax refund receivables	$140,000
	Benefit due to loss carryback		$140,000
	(To record the loss carryback)
2018	Deferred tax asset	$60,000
	Benefit due to loss carryforward		$60,000
	(To record the loss carryforward)