Question

Redbud began operations at the beginning of Year 1, and has one depreciable asset with an original cost of $200, acquired at the start of Year 1. Redbud uses straight-line depreciation over 5 years for financial reporting and MACRS (3-year asset). Information about carrying value and tax basis of the asset is found in the table below.

Book

Tax

Year	Depreciation	Carrying value	MACRS	Tax basis
1	40	160	66	134
2	40	120	90	44
3	40	80	30	14
4	40	40	14
5	40

In Years 1 and 2, Redbud had a small amount of positive net income and positive taxable income. In Year 3, Redbud experienced a $2,000 loss for net income. Redbud is not in an industry that is eligible for the carryback option, so Redbud will carry the loss forward. Redbud’s tax rate is 20%.

Requirements:

1. Calculate the net operating loss for Year 3.
2. Prepare the journal entry to record income taxes for Year 3.
3. Assume that Redbud only expects to realize 60% of the tax carryforward in future years. Prepare the necessary journal entry to adjust for this expectation.
4. In Year 4, Redbud earned net income of $200. Prepare the journal entry to record income taxes.

Answer 1

CALCULATION OF NET OPERATING LOSS :-

NET OPERATING LOSS FOR YEAR 3 NET LOSS 2000 INCOME TAX =+C3/80*20 NET OPERATING LOSS =+C3+C4

RESULTING TABLE:-

NET OPERATING LOSS FOR YEAR 3 NET LOSS $2,000.00 INCOME TAX $500.00 NET OPERATING LOSS $2,500.00

JOURNAL ENTRY FOR ADJUSTMENT:-

JOURNAL ENTRY

DATE	PARTICULRS	DEBIT($)	CREDIT($)
	Income tax expense	=+C4
	Provision for incomr tax		=+G4-H6
	Deffered tax liabilities		=+(80-14)*20%
	(To record the income tax expense)
date	particulars	debit($)	credit($)
	Deffered tax assets	=2000*60%
	Reserve & Surplus	=+H12-G10
	Net loss		2000
	(To record the adjustment of 60% on net loss)

Resulting table:-

JOURNAL ENTRY

Date	particulars	Debit($)	Credit($)
	Income tax expense	$500.00
	Provision for income tax		$486.80
	Deffered tax liabilities		$13.20
	(To record the income tax expense)
date	particulars	debit($)	credit($)
	Deffered tax assets	$ 1,200.00
	Reserve & Surplus	$800.00
	NET LOSS		$2,000.00
	(To record the adjustment of 60% on net loss)