Question

Golden Heart company began operations in 2016 and had a financial income before taxes and taxable income for the year ending 12/31/2016 Of 300,000. Their tax rate was 30%. They properly recorded the following entry at 12/31/2016:

Account

                                                Dr                   Cr

Income Tax expense             90,000            

            Income Tax payable                         90,000

Early in 2017 they paid their taxes and continued operating their business. Due to downturn in the economy. They had net operating loss of 800,000 for the period ending 12/31/2017. Once Again, they had no permanent or temporary differences.

A)Prepare the appropriate journal entries related to income taxes for period ending 12/31/2017. The tax rate remains 30%.

B)Assume the management of Golden Heart Corporation thinks that is more likely than not that 50% of the loss carryforward will not be realized because it is a new company and profits are not predicted ( This is before results of 2018 operations are known). Prepare additional Journal Entry for 12/31/2017.

C) What impact parts A & B have on the income statement (Indicate amount and decrease or Increase)

D) In 2018 Golden Heart Corporation recovers an operating income of 360,000. Taxable Income and financial income before taxes remain the same and the tax rate remains at 30% Assume that at the end of 2018 it is more likely than not that all of the deferred tax asset will be realized in the future.

Prepare all NESSESARY tax entries for 2018.

Answer 1

               Treatment of Deferred Tax Asset/ Liability

Answer (a).                             For the year 2017

Timing Difference	Amount	DTA (30%)	Amount
Opening balance		Opening balance	-
Addition	(800000)	Addition	240000
Deletion/Reversal	-	Deletion/Reversal	-
Closing balance	(800000)	Closing Balance	240000

                   Entry for recognising the DTA (assuming there is virtual certainty that

                    Sufficient future taxable income would be available against which deferred tax

                     Asset would be realised)

                                                  

                       DTA A/c     Dr          $240000

                          To Income Tax Expense (benefit)        $240000

                     (Being DTA has been recorded due to loss in current year)

Answer (b).                           For the year 2017 adjusted

		DTA (30%)
		Opening balance	-
		Addition	240000
		Deletion/Reversal	(120000)
		Closing Balance	120000

                     Since there is more likely than not that 50% of DTA would be realise in future as

                      Company is a new company and profits would not be predicted. Therefore due

                     50% virtual certainty we will consider only 50% of loss for DTA creation.

                     Additional Entry for reversal of DTA already created-

                      Income tax expense (benefit)   Dr.   $120000

                          To DTA                                                 $120000

                     (Being reversal of DTA already created)

Answer (c). Impact on income statement-

                   DTA will be shown under Non-current asset in balance sheet with $ 120000

                    Income tax expense will be credited to income statement by $120000.

Answer D.                                            For the year 2018

Timing Difference	Amount	DTA (30%)	Amount
Opening balance	(800000)	Opening balance	120000
Addition	360000	Addition	120000
Deletion/Reversal	-	Deletion/Reversal	(108000)
Closing Balance	(440000)	Closing Balance	132000

                  Entry for the year 2018-08-

                     Income tax expense (benefit)   Dr.          $108000

                         To DTA                                                         $108000

                    (Being realisation of DTA due to income earned during 2018.)