Question

Splish Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes.

Year		Pretax Income (Loss)			Tax Rate
2018		$125,000			17	%
2019		95,000			17	%
2020		(230,000			19	%
2021		301,000			19	%

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

1. Prepare the journal entries for the years 2018–2021 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryforward, assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future

2. Assuming that at the end of 2020 the benefits of the loss carryforward are judged more likely than not to be realized in the future, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

3. Prepare the journal entries for 2020 and 2021, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized.

4. Assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized, prepare the income tax section of the 2020 income statement, beginning with the line “Operating loss before income taxes.”

Answer 1

1.

Year	Particulars	Dr/Cr	Dr	Cr
2018	Income Tax Expense A/c	Dr	21250
	To Income Tax Payable A/c	Cr		21250
	(Being income tax expense charged)
2019	Income Tax Expense A/c	Dr	16150
	To Income Tax Payable A/c	Cr		16150
	(Being income tax expense charged)
2020	No entry as loss carryfoward are more likely not to be realised in future
2021	Income Tax Expense A/c	Dr	57190
	To Income Tax Payable A/c	Cr		57190

2.

Operating Loss before Income Taxes			(230,000)
Income Tax Benefit
Benefit due to loss carry back		-
Benefit due to loss carry forward		-
			-
Net Income/ (Loss)			(230,000)

3.

Year	Particulars	Dr/Cr	Dr	Cr
2017	Income Tax Refund Receivable A/c [230000 x 3/4 x 17%]	Dr	29325
	To Benefit of loss carryforward A/c	Cr		29325
	(Being income rax refundable recorded)
2018	Income Tax Expense A/c	Dr	51170
	To Income Tax Payable A/c	Cr		51170
	(Being income tax expense charged)
2018	Income Tax Payable A/c	Dr	29325
	To Income Tax Refund Receivable A/c	Cr		29325

4.

Operating Loss before Income Taxes			(230,000)
Income Tax Benefit
Benefit due to loss carryback		-
Benefit due to loss carryforward		29325
			29325
Net Income/ (Loss)			(200,675)