Chapter 18, Problem 15P

1.

To determine

Prepare a schedule that shows Corporation J‘s income taxes payable for each year.

Explanation of Solution

Inter-period Income Tax Allocation: The temporary difference and permanent difference arise out of the difference between the pre-tax financial income and taxable income of a company for any particular year. Since the temporary difference finally reverses, companies must allocate income tax liability across the future period to income tax expense.

Prepare a schedule that shows Corporation J‘s income taxes payable for each year:

Year	Pretax Financial Income(Loss)	Taxable Temporary Difference	Taxable Income(Loss)	Income taxes  payable (Receivables)
	(1)	(2)	$\left(3\right)=\left(1\right)-\left(2\right)$
2014	$27,500	$2,500	$25,000	$7,500(1)
2015	$57,800	$4,800	$53,000	$15,900(1)
2016	($87,300)	$2,700	($90,000)	($23,400)(2)
2017	$9,300	$2,300	$7,000	$0(3)
2018	$21,800	$2,800	$19,000	$4,200(4)

Table (1)

Working note 1:   For 2014 and 2015, the income taxes payable is determined by the formula $\text{Taxable income}\times \text{30\%}\left(\text{tax rate}\right)$.

Working note 2:  In the year 2014 and 2015, the operating loss of $78,000 of the $90,000 (operating loss) is carried back to offset future taxable income that has resulted a tax refund of $23,400 $\left(\$7,500+\$15,900\right)$ and the remaining $12,000 (operating loss) is carried forward.

Working note 3:  In the year 2017, $7,000 of the operating loss carry forward of $12,000 from 2016 is used to offset the taxable income. Thus, there are no income taxes payable. Thus, the operating loss of $5,000 is carried forward.

Working note 4:  In the year 2018, the operating loss carry forward of $5,000 is used to partially offset the $19,000 (2018) taxable income. So, the taxable amount is $14,000 $\left(\$19,000-\$5,000\right)$ and the income taxes payable is $4,200$\left(\$14,000\times 0.30\right)$.

2.

To determine

Prepare a schedule that shows the changes in temporary difference and operating loss carry forward) from 2017 through 2018.

Explanation of Solution

Prepare a schedule that shows the changes in temporary difference and operating loss carry forward) from 2017 through 2018:

Year	Beginning balance	$+$	Addition	$=$	Operating loss(ending)	Carry forward loss
2014	$0	$+$	$2,500	$=$	$2,500
2015	$2,500	$+$	$4,800	$=$	$7,300
2016	$7,300	$+$	$2,700	$=$	$10,000	($12,000)(5)
2017	$10,000	$+$	$2,300	$=$	$12,300	($5,000)(6)
2018	$12,300	$+$	$2,800	$=$	$15,100

Table (2)

Working Note 5:Determine the carry forward loss for 2016:

$\begin{array}{l}\text{Carry forward loss}\left(2016\right)=\text{ \$90,000}\left(\text{taxable loss}\right)-\$78,000\left(\text{operating loss carry back}\right)\\ \text{ = \$12,000}\end{array}$

Working Note 6:Determine the carry forward loss for 2017:

$\begin{array}{c}\text{Carry forward loss}\left(2017\right)=\left(\begin{array}{l}\text{\$12,000}\left(\text{carryforward loss of 2016}\right)\\ -\$7,000\left(\text{taxable income of 2017}\right)\end{array}\right)\\ =\text{\$5,000}\end{array}$

3.

To determine

Prepare a schedule that shows the deferred taxes from 2017 through 2018.

Explanation of Solution

Prepare a schedule that shows the deferred taxes from 2017 through 2018:

Table (3)

Notes:

• The ending deferred tax liability is calculated by multiplying 30% (tax rate) with the ending operating loss (from table 2).
• The ending deferred tax asset for 2016 is computed by multiplying 30% (tax rate) with the operating loss carry forward of $12,000 (from table 2).
• The ending valuation allowance for 2016 is computed by multiplying 30% (tax rate) with the operating loss carry forward of $12,000 (from table 2).
• The ending deferred tax asset for 2017 is computed by multiplying 30% (tax rate) with the operating loss carry forward of $5,000 (from table 2).
• The ending valuation allowance for 2017 is $0$\left[\left(\$5,000\right)\text{carryforward}-\$12,300\left(\text{Ending future taxable amount}\right)\times 30\%\right]$.

4.

To determine

Record the income tax journal entry at the end of 2016 based on requirement 3.

Explanation of Solution

Record the income tax journal entry at the end of 2016 based on requirement 3:

Date	Accounts title and explanation	Post Ref.	Debit ($)	Credit ($)
December 31, 2016	Income Tax Refund Receivable		23,400
	Deferred Tax Asset		3,600
	Deferred Tax Liability			810
	Allowance to reduce deferred tax asset to realizable value			600
	Income tax benefit from operating loss carryback			23,400
	Income Tax Payable(7)			2,190
	(To record the income tax refund receivable for deferred tax asset)

Table (4)

• Income Tax Refund Receivable is an asset and increased, so debit it for $23,400(Refer schedule for 2016 in requirement-1).
• Deferred Tax Asset is an asset and increased, so debit it for $3,600(Refer schedule for 2016 in requirement-3).
• Deferred Tax Liability is a liability and increased, so credit it for $810(Refer schedule for 2016 in requirement-3).
• Allowance to reduce deferred tax asset to realizable value is a contra asset and decreased, so credit it for $600(Refer schedule for 2016 in requirement-3).
• Income tax benefit from operating loss carryback is a component of stockholders’ equity and increased, so credit it for $23,400.
• Income tax payable is a liability and increased, so credit it for $2,190.

  Working note 7: Determine the amount of income taxes payable:

$\begin{array}{c}\text{Income taxes payable}=\left(\begin{array}{l}\text{Deferred }\\ \text{tax asset}\end{array}\right)-\left(\begin{array}{l}\text{Allownace to reduce}\\ \text{ deferred tax asset }\\ \text{to realizable value}\end{array}\right)-\left(\begin{array}{l}\text{Deferred tax }\\ \text{liability}\end{array}\right)\\ =\text{ \$3,600}-\text{\$600}-\text{\$810}\\ \text{=\$2,190}\end{array}$

5.

To determine

Prepare a partial 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.

Company J
Income Statement (partial)
For the year ended December 31,2016
Pre-tax operating loss		($87,300)
Less: Income tax benefit from operating loss carryback	$23,400
Less: Income tax benefit from operating loss carryforward	($2,190)	($25,590)
Net Loss (Refer Note)		($61,710)

Table (5)

Note: Company J is having $12,000 operating loss carry forward that can be used to offset the future taxable income up to 20 years and reduce the future income tax liability.

Thus, the net loss of CompanyJ is ($61,710).