Question

4. In 2016, its first year of operations, Banks Corp. reported pretax income of $200,000 and paid $60,000 of taxes. In 2017, Banks Corp. reported pretax income of $150,000 and paid $45,000 of taxes.

In 2018, Banks incurred a $400,000 net operating loss.

For all years the tax rate is 30% and there were no differences between taxable income and pretax financial statement income. Also, assume the current tax law (under the TCJA of 2017 that does not allow loss carrybacks).

Instructions

1. Record the entries in 2018 to record income tax considerations. (Assume at the end of 2018 management has deemed that it is more likely than not that 10% of the carryforward benefit will not be realized.)

2. In 2019, Banks reported pretax income of $550,000. Record the entries in 2019 to reflect all income tax considerations.

3. What is the net tax expense that Banks should report on the 2019 income statement?

4. Without showing calculations, explain how the entry for 2018 (part a.) would have been different under previous tax law.

Answer 1

a. for 2018:

s.no	particulars	debit	credit
1.	profit & loss a/c dr, to provision for income tax payable a/c (being tax charged to profit and loss account) 400000*30%	120000	120000
2.	provision for income tax payable a/c dr. to income tax payable a/c (being 10% tax adjusted during the year)	12000	12000

3.

income tax payable a/c dr. to bank a/c (being 10% tax paid)

12000

12000

b. for 2019

s.no	particulars	debit	credit
1.	profit & loss a/c dr, to provision for income tax payable a/c (being tax charged to profit and loss account) 550000*30%	165000	165000
2.	provision for income tax payable a/c dr. to income tax payable a/c (being tax adjusted during the year)	273000*	273000
3.	income tax payable a/c dr. to bank a/c (being tax paid for current year + previous year)	273000	273000

* from previous tax liability of Rs 120000, rs.12000 was adjusted in current year. remaining 108000 adjusted in 2019.

c. net tax expense to be reported in 2019 is rs.165000.

d. under previous tax law, the whole tax liability of rs. 120000 could have been carried forward to next year.