Question

Marimarsh Corporation reported the following pretax financial income (loss) for the years 2019 to 2021.

2019	$150,000
2020	($400,000)
2021	$200,000

Pretax financial income (loss) and taxable income (loss) were the same for all years. The applicable tax rates are 30% for 2019, and 20% for 2020 and 2021.

Instructions:

a) Prepare the journal entry in 2019 to record income tax expense.

b) Prepare the journal entries in 2020 for the tax effects of the loss carryforward, assuming that based on the weight of evidence it is more likely than not that one-quarter of the benefits of the loss carryforward will not be realized.

c) Prepare the journal entry in 2021 to record income tax expense.

Answer 1

a)Journal Entry in 2019 to record tax expense:

TAxable income in 2019 = 150000$

Tax rate in 2019 = 30%

Tax expense = 150000*30% = 45000$

Journal entry ; Income tax expense (p&L item) dr 45000

To Income tax payable (liability) 45000

b) Journal Entry in 2020 to record loss carry forward:

incase the taxable person has carry forward losses, deferred tax asset should be recognised only to the extent that there is certainity supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax asset can be realised.

It is given in the question that there is a high chance that a quarter of the carryforward loss is not realisable.

i.e 4,00,000 * 20%* 1/4 = 20000

which means Marimarsh corporation can recognise deferred tax asset to the extent of 60,000$ (3/4 of 4,00,000*20%)

Entry : Deferred tax asset dr 60000

TO Income tax benifit for loss carrfoward 60000

c) Journal Entry in 2021:

Taxable income in 2021 =200000$

Tax rate = 20%

Tax expense = 40000

Entry: income tax expense dr 40000

To deferred tax asset 40000