(NOL Carryback and Carryforward, Valuation Account versus No Valuation Account)

Question

(NOL Carryback and Carryforward, Valuation Account versus No Valuation Account) Public Wares Corporation reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss and 2013 is the company’s first year of operations.) Year Pretax Income (Loss) Tax Rate 2013 $230,000 40% 2014 (335,000) 40% 2015 (50,000) 35% 2016 265,000 30% The tax rates listed were all enacted by the beginning of 2013. Instructions (a) Prepare the journal entries for the years 2013 through 2016 to record income tax expense (benefit) and income tax payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that the benefits of any loss carryforwards are judged more likely than not to be realized in the future. (b) Prepare the income tax section of the 2014 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the income tax section of the 2015 income statement beginning with the line “Operating loss before income taxes.”

Explanation / Answer

Ans 1

Year Accounting head Debit Credit 2013 Income Tax Expense 92,000.00 Current Tax Payable        92,000.00 2014 Carry Back Tax Asset 69,000.00 Carry Forward Tax Asset 31,500.00 Income Tax Benefit    1,00,500.00 Note: Assume that the Company expect the profits in 2016 when the tax rate is 30% 2015 Carry Forward Tax Asset 15,000.00 Income Tax Benefit        15,000.00 2016 Income Tax Expense 79,500.00 Current Tax Payable        79,500.00 Current Tax Payable 79,500.00 Carry Back Tax Asset        69,000.00 Carry Forward Tax Asset        10,500.00 Ans 2 Income Tax Section-P&L 2014 Details Amount Operating Loss Before Income Taxes -3,35,000.00 Income Tax Benefit    1,00,500.00 Operating Loss After Income Tax -2,34,500.00 Ans 3 Income Tax Section-P&L 2015 Amount Operating Loss Before Income Taxes      -50,000.00 Income Tax Benefit        15,000.00 Operating Loss After Income Tax      -35,000.00

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