Question

Tamarisk Inc. reported the following pretax income (loss) and related tax rates during the years 2019–2022.

		Pretax Income (loss)			Tax Rate
2019		$88,000			40	%
2020		(198,000)			40	%
2021		220,000			20	%
2022		110,000			20	%

Pretax financial income (loss) and taxable income (loss) were the same for all years since Tamarisk began business. The tax rates from 2019–2022 were enacted in 2019.

Prepare the journal entries for the years 2020–2022 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryforward. Assume that Tamarisk expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.

Prepare the portion of the income statement, starting with “Operating loss before income taxes,” for 2020.

Prepare the portion of the income statement, starting with “Income before income taxes,” for 2021.

Answer 1

ANSWER:

Journal Entries - Tamarisk Inc.
Year	Particulars	Debit	Credit
2020	Receivables - Income Tax Refund	$35,200.00
	Deferred Tax Assets Dr	$22,000.00
	To Income tax benefit - Net Operating Loss		$57,200.00
	(Being income tax benefit due to loss carryback recorded)
2021	Income tax expense Dr	$44,000.00
	To Income tax Payable		$22,000.00
	To Deferred tax assets		$22,000.00
	(To record income tax expense and reversal of deferred tax asset)
2022	Income tax expense Dr	$22,000.00
	To Income tax Payable		$22,000.00
	(To record income tax expense for the year)

Income Statement - Tamarisk Inc. For the year ended 2020
Particulars	Amount
Operating Income (loss) before income tax	-$198,000.00
Income tax benefit - Net operating loss	$35,200.00
Income tax benefit - Deferred Tax Assets	$22,000.00
Net Operating Income (Loss)	-$140,800.00

Income Statement - Tamarisk Inc. For the year ended 2021
Particulars	Amount
Operating Income (loss) before income tax	$220,000.00
Income tax expense:
Current tax	$22,000.00
Reversal of Deferred tax assets	$22,000.00
Net Operating Income (Loss)	$176,000.00