Question

The pretax financial income (or loss) figures for Concord Company are as follows.

2015		$166,000
2016		258,000
2017		77,000
2018		(166,000	)
2019		(384,000	)
2020		131,000
2021		105,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 25% tax rate for 2015 and 2016 and a 20% tax rate for the remaining years.

Prepare the journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit
2017
enter an account title to record carryback	enter a debit amount	enter a credit amount
enter an account title to record carryback	enter a debit amount	enter a credit amount
2018
enter an account title to record carryforward	enter a debit amount	enter a credit amount
enter an account title to record carryforward	enter a debit amount	enter a credit amount
2019
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
2020
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount
2021
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a credit amount	enter a debit amount

Answer 1

(Amount in $)

Year	Partiular	Dr	Cr
2017	Income Tax Expense A/C Dr	15400
	To Cash/Bank A/C		15400
	(Being Tax paid for 2017)
2018	Income Tax Refund Receivable A/c Dr	33200
	To Income Tax Expense A/C		33200
	(Being Tax claim for Year 2016 against a loss of $166000 during 2018
2019	Income Tax Refund Receivable A/c Dr	15400
	To Income Tax Expense A/C		15400
	(Being Tax Claim for Year 2017 against a loss of $384000 during 2019) (77000*20%)
	Defered Tax Asset A/C Dr	61400
	To Income Tax Expense A/C		61400
	(Being Balance of credit Carryforward) ($307000*20%)
2020	Income Tax Expense A/C Dr	26200
	To Defered Tax Asset A/C		26200
	(Being Tax Paid using credit carryforward from year 2019) Balance $35200
2021	Income Tax Expense A/C Dr	21000
	To Defered Tax A/C		21000
	(Being Tax Paid using Credit Carryforward from Year 2019) Balance 1$4200

Explanation:

In case a company incured a loss the same can be setoff against a profit of 2 previous years and in case there is any excess the same can be carry forward for next 20 years

Hence loss incured in year 2018 i.e $166000 is utilised to setoff profit incured during 2016.

and loss incured in 2019 is setoff against a profit of year 2017 and balance is carry forward to year 2020 and 2021

Tax Rate for Carry forwards or carry back will be the rate of tax in the year of loss.

For example tax rate in the year 2016 was 25% but when setoff was done for a loss incured in 2018 rate was 20% hence the amount of setoff is $166000*20% i.e $33200.