Question

Bramble Inc. reports the following pretax income (loss) for both book and tax purposes.

Year		Pretax Income (Loss)			Tax Rate
2018		$117,000			20	%
2019		90,000			20	%
2020		(257,000)			25	%
2021		123,000			25	%

Prepare the journal entries for years 2018–2021 to record income tax expense (benefit) and income taxes payable (refundable), and the tax effects of the loss carry forward, assuming that based on the weight of available evidence, it is more likely than not that one-half of the benefits of the loss carry forward will not be realized.

Prepare the income tax section of the 2020 income statement beginning with the line “Operating loss before income taxes.”

Prepare the income tax section of the 2021 income statement beginning with the line “Income before income taxes.”

The tax rates listed were all enacted by the beginning of 2018.

Answer 1

Year	Pretax Income (Loss)	Tax Rate	Income tax
2018	$                                                              117,000.00	20%	$       23,400.00
2019	$                                                                90,000.00	20%	$       18,000.00
2020	$                                                            (257,000.00)	25%	$     (64,250.00)
2021	$                                                              123,000.00	25%	$       30,750.00
Year	Accounts Titles and Explanation	Debit	Credit
2018	Income tax expense	$    23,400.00
	Income tax payable		$       23,400.00
2019	Income tax expense	$    18,000.00
	Income tax payable		$       18,000.00
2020	Income tax refund receivable (23400+18000)	$    41,400.00
	Deferred tax asset (257,000 - 90000-117000) =50000 x 25%	$    12,500.00
	Benefit due to loss carryback		$       41,400.00
	Benefit due to loss carryforward		$       12,500.00
	Benefit due to loss carry forward	$      6,250.00
	Allowance to Reduce Deferred Tax Asset to Expected Realizable Value (12500 x 50%)		$         6,250.00
2021	Income Tax Expense	$    30,750.00
	Deferred Tax Asset		$       12,500.00
	Income Tax Payable (123000 -50000) x 25%		$       18,250.00
	Allowance to Reduce Deferred Tax Asset to Expected Realizable Value	$      6,250.00
	Benefit Due to Loss Carryforward		$         6,250.00
b)		Operating loss before income taxes		$   (257,000.00)
	Income tax benefit
	Benefit due to loss carryback	$    41,400.00
	Benefit due to loss carryforward ($12,500 – $6,250	$      6,250.00	$       47,650.00
	Net Loss		$   (209,350.00)
c)	Income before income taxes		$     123,000.00
	Income tax expense
	Current	$    18,250.00
	Deferred	$    12,500.00
	Benefit due to loss carryforward	$     (6,250.00)	$       24,500.00
	Net income		$       98,500.00