Question

Ross Company has been in business for several years, during which time it has been profitable. For each of those years, Ross reported (and paid taxes on) taxable income in the same amount as pretax financial income based on the following revenues and expenses:

	Revenues	Expenses
2012	$182,000	$150,000
2013	220,000	170,000
2014	253,000	180,000
2015	241,000	196,000

Ross was subject to the following income tax rates during this period: 2012, 20%; 2013, 25%; 2014, 30%; and 2015, 25%. During 2016, Ross experienced a severe decrease in the demand for its products. The company tried to offset this decrease with an expensive marketing campaign, but was unsuccessful. Consequently, at the end of 2016, Ross determined that its revenues were $60,000 and its expenses were $193,000 during 2016 for both income taxes and financial reporting.

Ross decided to carry back its 2016 operating loss because it was not confident it could earn taxable income in the future carryforward period. The income tax rate was 30% in 2016, and no change in the tax rate had been enacted for future years.

In 2017, Ross developed and introduced a new product that proved to be in high demand. On June 1, 2017, Ross received a refund check from the government based on the tax information it filed at the end of 2016. For 2017, Ross reported revenues of $181,000 and expenses of $155,000 for both income taxes and financial reporting. The applicable income tax rate was 30%.

Required:

1.	Prepare Ross’s income tax journal entries at the end of 2016.
2.	Prepare Ross’s 2016 income statement. Include a note for any operating loss carryforward.
3.	Prepare the journal entry to record the receipt of the refund check on June 1, 2017.
4.	Prepare the income tax journal entry at the end of 2017.
5.	Prepare Ross’s 2017 income statement.

CHART OF ACCOUNTS
Ross Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 125 Income Tax Refund Receivable 141 Inventory 152 Prepaid Insurance 160 Deferred Tax Asset 169 Allowance to Reduce Deferred Tax Asset to Realizable Value 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 260 Deferred Tax Liability 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense 911 Income Tax Benefit from Operating Loss Carryforward 912 Income Tax Benefit from Operating Loss Carryback

Prepare Ross’s income tax journal entries on December 31, 2016. Additional Instruction

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5
6

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

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2

Prepare the income tax journal entry on December 31, 2017.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4

Amount Descriptions
Expenses
Net income
Net loss
Pretax operating income
Pretax operating loss
Revenues

Prepare Ross’s 2016 income statement. Include a note for any operating loss carryforward. Additional Instructions

ROSS COMPANY

Income Statement

For Year Ended December 31, 2016

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2
3
4
5

Net loss: The company has a operating loss carryforward that can be used within years to offset future taxable income and reduce income taxes.

Prepare Ross’s 2017 income statement. Additional Instructions

ROSS COMPANY

Income Statement

For Year Ended December 31, 2017

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2
3
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5

Answer 1