Recording NOL Carryforward and Carryback|Carryforward
Toner Corporation computed the following: Year 1 taxable income, $10,000; Year 2 taxable loss, $( 40,000). At the end of Year 2, Toner made the following estimates: Year 3 taxable income, $4,000; Year 4 taxable income, $11,000; and Year 5 taxable income, $50,000. On the basis of these estimates, Toner believes the full amount of the tax loss carryforward benefit is more likely than not to be realized. There are no other temporary differences. Tax rates are 25% for Year 1, Year 2, and Year 3; and 30% for Year 4 and Year 5. Net operating loss carryforwards can only offset a maximum of 80% of taxable income in each of the future years.
Required
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Transcribed Image Text:a. Provide the income tax entry for Year 2.
Date
Dec. 31, Year 2 Deferred Tax Asset
Account Name
Income Tax Expense
To record income tax expense
Date
Dec. 31, Year 3 Income Tax Expense
Account Name
Deferred Tax Asset
Income Tax Payable
To record income tax expense
b. Provide the income tax entry for Year 3, assuming that the actual taxable income was $6,000 (tax rate, 25%).
Dr.
Date
Dec. 31, Year 4 Income Tax Payable
Deferred Tax Asset
Income Tax Expense
To record income tax expense
Account Name
Dr.
10,000
0
Dr.
1,500
0
0
Cr.
c. Provide the income tax entry for Year 4, assuming that Year 3 results were as described in part b, and that the actual Year 4 taxable
income was $13,000.
3,900
0
0
Cr.
0x
10,000 X
Cr.
0x
1,000 X
500 X
0x
2,750 X
1,150 X
Transcribed Image Text:d. Provide the entry for Year 5, assuming results for Year 3 and Year 4 were as described in parts b and c, and assuming that the actual
Year 5 taxable income was $45,000.
Date
Dec. 31, Year 5 Income Tax Payable
Account Name
Valuation Allowance for Deferred Tax Asset
Deferred Tax Liability
To record income tax expense
Date
Dec. 31, Year 2 Income Tax Expense
Deferred Tax Asset
Dr.
Income Tax Payable
To record income tax expense
13,500
0
0
e. Assume instead that the company qualifies for a two-year loss carryback for tax purposes, using the earlier year first and with no
income restrictions. Assume also that any excess loss can then be carried forward indefinitely, with no income restrictions. Prepare the
income tax journal entry for Year 2.
Account Name
Dr.
Cr.
0
0
0
0x
6,250 *
7,250 X
Cr.
0x
0x
0X
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