Question

Use the information for Rode Inc. given in BE19-13. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2017.

Short answer

Thenet operating lossis the type oflossan organization suffers when theallowable deductionof the firm ishigherthan theamount of taxable incomeduring afinancial year.

Step-by-step solution

Determining the amount of loss carryback and loss carryforward amount for 2013

$\begin{array}{rcl}\mathrm{Loss}{\mathrm{Carryback}}_{2018}& =& \mathrm{Combined}\mathrm{Income}\times \mathrm{Tax}\mathrm{rate}\\ & =& \$350,000\times 40\%\\ & =& \$140,000\end{array}$

$\begin{array}{rcl}\mathrm{Loss}\mathrm{carry}{\mathrm{forward}}_{2018}& =& (\mathrm{Net}\mathrm{operating}\mathrm{loss}-\mathrm{Combined}\mathrm{Income})\times \mathrm{Tax}\mathrm{Rate}\\ & =& (\$500,000-\$350,000)\times 40\%\\ & =& \$150,000\times 40\%\\ & =& \$60,000\end{array}$

Recording of journal entry for 2018

Rode Inc.
Journal entry for the year 2018
Date	Particulars	Debit	Credit
2018	Income tax refund receivables Dr.	$140,000
	To Benefit due to loss carryback		$140,000
	(To record the loss carryback for 2018)
2018	Deferred tax asset Dr.	$60,000
	To Benefit due to loss carryforward		$60,000
	(To record the loss carryforward for 2018)
2018	Benefit due to loss carryforward Dr.	$60,000
	To Allowance to reduce deferred tax asset to expected realizable value		$60,000
	(To record the allowance to reduce the deferred tax asset for 2018)