In 2013, its first year of operations, The Marissa Corp. had a $ 600,000 net ope

Question

In 2013, its first year of operations, The Marissa Corp. had a $ 600,000 net operating loss when the tax rate was 30 %. There are no differences between book (GAAP) income and taxable income. In 2013, the management of The Marissa Corp. determined that it was more likely than not that it would not realize the loss carryforward in the near future because the company had only been in operations for one year. In 2014, The Marissa had $ 240,000 taxable income and the tax rate remained 30 % What are the journal entries in 2013 to record the tax loss carryforward? What journal entries should Marissa make in 2014 to record the current and deferred income taxes and to recognize the loss carryforward? Assume that in 2013 management believes that the maximum amount of taxable income available for realization of the NOL carryforward is S 360,000. Therefore, $ 240,000 of the NOL carryforward is expected to remain unrealized in the future. What entries are required to record the 2013 and 2014 tax provisions? a. b. c. d. Based on your answer to part (c), prepare the footnote, in dollars and percentages, to reconcile the federal tax rate to the firm's effective (actual) income tax rate for each year presented.

Explanation / Answer

a. Journal entry to record tax loss to be carry forward in 2013:

Deferred Taxes Dr. 180000

Income Taxes Cr. 180000

[Deferred tax asset of $180000(600000*.30) to be recognised for the tax loss subject to recoverability and to be carried forward in Balance Sheet ]

b. In 2014, the current tax payable on profits of $240000 shall be set off from the debit balance of Deferred tax asset recognised in 2013. the Journal entry shall be as folllows:

Income taxes Dr. 72000

Deferred Taxes    Cr. 72000

[the current tax of $72000(240000*.30) shall be set off with the Deferred tax asset and a balance of $108000 shall be carry forward in balance sheet after the set off]

c. if management estimate that only $360000 would be recoverable in future years then out of NOL of $600000, deferred tax asset shall be recognised upto an amount of $360000 only and the remaining shall be treated as permanent difference.

2013: Deferred Tax    Dr. 108000 (360000*.30)

   Income tax Cr.    108000

2014: Income tax Dr. 72000

   Deferred tax Cr. 72000

Finally, a balance of $36000 shall be carried forward as deferred tax asset in year 2014 to be set off in future years.

d. Income Tax Footnote-

Year 2013:

Reconciliation:

Net Operating Loss-$600000

Tax credit carry forward-$108000

Unrecognised Tax benefit-$72000

Deferred Tax Asset- $108000

Year 2014:

Reconciliation:

Net Operating Profit-$240000

Tax credit carry forward set off- $72000

Deferred Tax Asset- $36000

Particulars Amount($) Percentage(%) Total income tax benefit 108000 18%(108000/600000) Current Benefit 0 0% Deferred benefit 108000 18%

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.