Question

Playgrounds, Inc., is granted a distribution franchise by Shady Products in Year 1. Operations are profitable until Year 4 when some of the company’s inventories are confiscated and large legal expenses are incurred. Playgrounds’ tax rate is 50% each year (all expenses and costs are tax deductible). Relevant income statement data are (in thousands):

 

Required:

Compute tax expense for each of the Years 1 through 8, and present comparative income statements for these years (assume a 3-year carryback period, a 20-year carryforward period for any losses, and a 100% valuation allowance for the loss carryforward).

Answer 1

Income statement:

• An income statement reports the results of business transactions over a period, usually for a month or a year.

• In the income statement, total expenses are deducted from total revenues.

• When the total revenue exceeds total expenses over the period, the result is net income.

• When the total expenses exceed total revenue over the period, the result is net loss.

 

An income statement reports the results of business transactions over a period, usually for a month or a year.

 

• Taxable income $20 $35 $50 ($300) (65)b $185 c $260 $300

• Tax due at 50 rate $1017.525(52.5)a 0 92.5130150

• A. Operating loss of $300 carted back to eliminate all taxable income for Year 1, Year 2 and Year 3 and secure refund of $52.5 for total taxes paid during those years.

• B Income for Year 5 of $130 less loss carry forward of $195

• income fro Year 6 of $250 less loss carryforward of $65

• ** Disclosure: Tax loss carry forwards are $195 at end of Year 4 and $65 at end of Year 5

 

Accounting effects (Journal entries – Dr.(Cr.)