Question

At the end of 2016, its first year of operations, Swelland Company reported a pretax operating loss of $32,000 for both financial reporting and income tax purposes. At that time, Swelland had no positive verifiable evidence that it would earn future taxable income. However, due to successful management, the company reported pretax operating income (and taxable income) of $70,000 in 2017. During both years, the income tax rate was 30%, and no change had been enacted for future years.

Required:

1.	Prepare Swelland’s income tax journal entries at the end of 2016.
2.	Prepare Swelland’s income tax journal entry at the end of 2017.
3.	Prepare the lower portion of Swelland’s 2017 income statement.

CHART OF ACCOUNTS
Swelland Company
General Ledger
ASSETS 111 Cash 121 Accounts 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 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

Prepare Swelland’s income tax journal entries on December 31, 2016.

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GENERAL JOURNAL

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

Prepare Swelland’s income tax journal entry on December 31, 2017. Additional Instruction

PAGE 1

GENERAL JOURNAL

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

Amount Descriptions
Net income
Net loss
Pretax operating income
Pretax operating loss

Prepare the lower portion of Swelland’s 2017 income statement. Additional Instructions

SWELLAND COMPANY

Partial Income Statement

For the year ended December 31, 2017

1
2
3

Answer 1

Answer :-

SC makes the following journal entry for the year 2016:

Date	Accounts and Explanation	Debit($)	Credit($)
Dec 31 2016	Deferred Tax Asset	9,600
	Income tax benefit from operating loss carry forward		9,600
	(Being future tax benefit from operating loss carry forward)

Calculation of Deferred Tax Asset :

Deferred tax asset = Pretax operating loss * Tax rate.

= $32,000 * 30%

= $9,600.

Deferred Tax asset is debited in future will get benefit from operating loss forward of the current year.

If Swelland Company establishes valuation allowance for entire amount of Deferred tax asset.

Date	Accounts and Explanation	Debit($)	Credit($)
Dec 31,2016	Income tax benefit from operating loss carry forward	9,600
	Allowance to reduce DTA to net realizable value		9,600
	(Being DTA reduced to net realizable value)

2.The Company reported pretax operating income of $70,000 in 2017.

Swelland's record the following journal entry for the year 2017:-

Date	Accounts and Explanation	Debit($)	Credit($)
Dec 31,2017	Income tax expense	11,400
	Allowance to reduce DTA to net realizable value	9,600
	Income tax payable		11,400
	Deferred Tax Asset		9,600
	(Being income tax expense debited)

The company realizes the tax benefit from operating loss carry forward in 2017 by reducing income tax payable.It offsets the $32,000 carry forward from 2016 against the $70,000 operating income in 2017 resulting in taxable income of $38,000 for the year 2017.So,income tax payable for the year 2017 is

Income tax payable = Net taxable income * Income tax rate

= $38,000 *30%

= $11,400.

3. The lower portion of Swelland 's Company 2017 income statement is as follows :

Pretax operating income for the year 2017	70,000
Less:Income tax expense	11,400
Net Operating income	$58,600

Swelland's company reduces the income tax expense from $70,000 *30% = $21,000 to $38,000*30% = $11,400,thereby reducing the income tax expense of $21,000 - $11,400 = $9,600.