Question

Topper company reported the following pre-tax financial income (loss for the years 2013-2017)

2013      70,000               30%       21,000

2014      45,000               30%       13,500

2015      -260,000             30%       0

2016      90                        35%       0

2017      215,000              35%       15,750

Topper company reported the following pre-tax financial income (loss for the years 2013-2017) 2013 70,000 2014 45,000 2015 -260,000 2016 90 2017 215,000 Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 30% for 2013 through 2015, and 35% for 2016 and thereafter. Assume the carryback provision is used first for net operating losses. Instructions: A. Prepare the journal entries for the years 2013 through 2017 to record income tax expense, income tax payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that 60 percent of the benefits of the loss carryforward will not be realized. B. Prepare the income tax section of the 2015 income statement beginning with the line “income (loss) before income taxes”.

Answer 1

Journal entries:-

Year	Particulars	Debit ($)	Credit ($)
2013	Statement of Profit or loss A/C	21,000
	To Income tax payable A/C		21,000

Year	Particulars	Debit ($)	Credit ($)
2014	Statement of Profit or loss A/C	13,500
	To Income tax payable A/C		13,500

Calculation of Current Tax :-

Particulars	2015	2016	2017
Pretax financial income (loss)	(260,000)	90	215,000
Taxable Income	(260,000)	90	215,000
Carry forward of losses	260,000	259,910	44,910
Brought forward losses	0	260,000	259,910
Current tax	0	0	0

Calculation of Deferred Tax :-

	2015	2016	2017
Opening balance of timing difference	0	260,000	259,910
Addition :- Carry forward of losses	260,000
Deletion	0	90	215,000
Closing balance	260,000	259,910	44,910
Deferred tax Asset	78,000	90,968.5	15,718.5
Opening balance of D. tax asset	0	78000	90,968.5
Creation/ (reversal) of D.tax	78,000	12,968.5	(75,250)

Statement of Profit or loss :-

Particulars	2015	2016	2017
Accounting Income	(260,000)	90	215,000
Current Tax	0	0	0
Deferred Tax	(78,000)	(12,968.5)	75,250

Journal Entries :-

Year	Particulars	Debit ($)	Credit ($)
2015	Deferred tax asset A/C	78,000
	To Statement of Profit or loss A/C		78,000

Year	Particulars	Debit ($)	Credit ($)
2016	Deferred tax asset A/C	12,968.5
	To Statement of Profit or loss A/C		12,968.5

Year	Particulars	Debit ($)	Credit ($)
2017	Statement of profit or loss A/C	75,250
	To Deferred tax asset A/C		75,250