Chapter 18, Problem 10P

1.

To determine

Prepare journal to record the entry for income tax of Company R at the end of 2016.

Explanation of Solution

Operating loss carryback: Carry back of net operating losses can help provide cash infusion for business taxpayers by offsetting net income in previous years, resulting in a tax refund.

Prepare journal to record the entry for income tax of Company R at the end of 2016:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2016
December 31	Income tax refund receivable (1)		33,150
	Income tax benefit from operating loss carry back			33,150
	(To record the income tax refund from operating loss carryback)
December 31	Deferred Tax Asset (2)		4,500
	Income Tax Benefit From Operating Loss             Carry Forward			4,500
	(To record deferred tax asset for carry forwarding operating loss)
December 31	Income Tax Benefit from Operating Loss Carry forward		4,500
	Allowance to reduce deferred tax asset to             realizable value			4,500
	(To record the creation of valuation allowance for deferred asset)

Table (1)

December 31, 2016: To record the income tax refund from operating loss carryback:

• Income tax refund receivable is asset and it is increased. Thus, it is debited.
• Income Tax Benefit from Operating Carry Forward is a component of stockholders’ equity and increases, so credit it for $33,150.

December 31, 2016: To record deferred tax asset for carry forwarding operating loss:

• Deferred Tax Asset is an asset and increases, so debit it for $4,500.
• Income Tax Benefit from Operating Carry Forward is a component of stockholders’ equity and increases, so credit it for $4,500.

December 31, 2016: To record the creation of valuation allowance for deferred asset:

• Income Tax Benefit from Operating Loss Carry forward is a component of stockholders’ equity and decreased, so debit it for $4,500.
• Allowance to reduce deferred tax asset to realizable value is a contra asset and decreased, so credit it for $4,500.

Working note: 1: Calculate the amount of income tax refund receivable:

Year	Revenues	Expenses	Taxable income	Tax rate	Refund
	(1)	(2)	$\left(3\right)=\left(1\right)-\left(2\right)$	(4)	$\left(5\right)=\left(3\right)\times \left(4\right)$
2014	$253,000	$180,000	$73,000	30%	$21,900
2015	$241,000	$196,000	$45,000	25%	$11,250
Total			$118,000		$33,150

Table (2)

Working note 2: Compute the deferred tax asset:

$\begin{array}{c}\text{Deferred tax asset}=\text{Pre-tax income}\times \text{Corporate tax rate}\\ =\$15,000\times 30\%\\ \text{=\$4,500}\end{array}$

2.

To determine

Prepare the lower portion of Company R’s income statement for 2016.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the income statement of Company R for 2016:

Company R
Income Statement
For the year ended December 31, 2016
Revenues	$60,000
Less: Expenses	($193,000)
Pre-tax operating loss	($133,000)
Less: Income tax benefit from operating loss carryback (3)	($33,150)
Net Loss	($99,850)

Table (2)

Note: Company R incurred a pre-tax operating loss of $15,000 that can be carried forward for 20 years to offset the future assessable income and lessen the income tax.

Thus, the net loss of Company R for 2016 is $99,850.

3.

To determine

Prepare the journal entry to record the receipt of the refund check on June 1, 2017.

Explanation of Solution

Prepare the journal entry to record the receipt of the refund check on June 1, 2017:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
June 1, 2017	Cash (1)		33,150
	Income Tax Refund Receivable			33,150
	(To record the receipt of check on account of tax refund)

Table (3)

• Cash is an asset and increases so debit it for $33,150.
• Income Tax Refund Receivable is an asset and decreases, so credit it for $33,150.

4.

To determine

Prepare journal to record the entry for income tax of Company R at the end of 2017.

Explanation of Solution

Prepare journal to record the entry for income tax of Company R at the end of 2017:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
2017
December 31	Income Tax Expense (3)		3,300
	Allowance to Reduce Deferred Tax Asset to Realizable Value		4,500
	Income Taxes Payable			3,300
	Deferred Tax Asset (2)			4,500
	(To record the income tax expense with the deferred tax asset)

Table (4)

To record the income tax expense with the deferred tax asset:

• Income Tax Expense is a component of stockholders’ equity and decreases, so debit it for $3,300.
• Allowance to reduce deferred tax asset to realizable value is a contra asset and decreased, so credit it for $4,500.
• Income Taxes Payable is a liability and it is increased. Thus, it is credited.
• Deferred Tax Asset is an asset and decreases, so credit it for $4,500.

Working note 3: Compute the income tax payable for the year 2017:

Computation of income tax payable
Revenues	$181,000
Less: Expenses	($155,000)
Pre-tax operating income (a)	$26,000
Less: Operating loss carry forward	($15,000)
Net Loss	$11,000
Less: Income tax rate (b)	30%
Income taxes payable $\left(\text{c}\right)=\left(\text{a}\right)\times \left(\text{b}\right)$	$3,300

Table (5)

5.

To determine

Prepare the income statement of Company R for 2017.

Explanation of Solution

Prepare the income statement of Company R for 2017:

Company R
Income Statement
For the year ended December 31, 2017
Revenues	$181,000
Less: Expenses	($155,000)
Pre-tax income	$26,000
Less: Income tax expense	($3,300)
Net income	$22,700

Table (6)

Thus, the net income of Company R for 2017 is $22,700.