In 2014, its first year of operations, Kimble Corp. has a $800,000 net operating
ID: 2475414 • Letter: I
Question
In 2014, its first year of operations, Kimble Corp. has a $800,000 net operating loss when the tax rate is 30%. In 2015, Kimble has $350,000 taxable income and the tax rate remains 30%.
Instructions
Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2015 operations are known).
(a) What are the entries in 2014 to record the tax effects of the loss carryforward?
(b) What entries would be made in 2015 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2013 it is more likely than not that the deferred tax asset will be realized.)
Hunt Co. at the end of 2015, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $ 750,000
Estimated warranty expenses deductible for taxes when paid 1,200,000
Extra depreciation (1,650,000)
Taxable income $ 300,000
Estimated warranty expense of $800,000 will be deductible in 2016, $300,000 in 2017, and $100,000 in 2018. The use of the depreciable assets will result in taxable amounts of $550,000 in each of the next three years.
Instructions
(a) Prepare a table of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2015, assuming an income tax rate of 40% for all years.
Explanation / Answer
Entries in 2014: a) Deferred Tax Asset……………. 240000 (800000*30%) To benefit due to Loss Carryforward 240000 Benefit due to Loss Carryforward 240000 To allowance to reduce 240000 Deferred Tax Asset to Expected realisable Value Entries in 2015 b) Income Tax Expense………… 105000 (350000*30%) To deferred Tax Asset 105000 Allowance to reduce Deferred Tax Asset to Expected realisable Value…………. 105000 To benefit due to Loss Carryforward 105000 2) Hunt Co. 2016 2017 2018 Total a) Future Taxable Amounts $550,000 $550,000 $550,000 $1,650,000 Warranty ($800,000) ($300,000) ($100,000) b) Income Tax Expense………………… 300000 (120000+660000-480000) Deferred Tax Asset………………………… 480000 (1200000*40%) To deferred Tax Liability 660000 (1650000*40%) To Income Tax Payable 120000 (300000*40%)
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