Question

Exercise 16-22 Net operating loss carryback and carryforward [LO16-7]

Wynn Sheet Metal reported an operating loss of $180,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

	Taxable Income			Tax Rates			Income Taxes Paid
2014	$	70,000		30	%		$	21,000
2015		80,000		30				24,000
2016		90,000		40				36,000
2017		70,000		45				31,500

Required:
1. Complete the following table given below and prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option.
2. Show the lower portion of the 2018 income statement that reports the income tax benefit of the operating loss.

Answer 1

Operating loss carryback	Amount		Rate %	Tax	Recorded as:
Carried back - 2014	$0.00	X	30.00%	$0.00
Carried back - 2015	$0.00	X	30.00%	$0.00
Carried back - 2016	$90,000.00	X	40.00%	$36,000.00
Carried back - 2017	$70,000.00	X	45.00%	$31,500.00
Total carryback				$67,500.00	Receivable-income tax refund
Operating loss carryforward
Carried forward $180,000 - $90,000 - $70,000)	$20,000.00	x	40.00%	$8,000.00	Deferred tax asset-ending
Journal Entry
General Journal	Debit	Credit
Receivable—Income tax refund	$67,500.00
Deferred tax asset	$8,000.00
Income tax benefit—Net operating loss		$75,500.00
2)
Operating loss before income taxes		-$180,000.00
Income tax benefit:
Tax refund from loss carryback	$67,500.00
Future tax savings from loss carryforward	$8,000.00
		$75,500.00
Net loss		-$104,500.00