Question

E19-23: Sondgeroth Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes (assume the carryback provision is used first).

Year	Pretax Income (loss)	Tax Rate
2012	$120,000	34%
2013	$90,000	34%
2014	$(280,000)	38%
2015	$220,000	38%

The tax rates listed were all enacted by the beginning of 2012.

1. Prepare the journal entries for the years 2012-2015 to record income tax expense (benefit), income taxes payable (refundable), and the tax effects of the loss carryback and carryforward, assuming that at the end of 2014 the benefits of the loss carryforward are judged more likely than not to be realized in the future.

2.Prepare the journal entries for 2014 and 2015, 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.

Answer 1

1.

Date	General Journal	Debit	Credit
2012	Income Tax Expense	40800
	Income Tax Payable		40800
	(Income Taxes Payable)  ($120,000 X 34%)
2013	Income Tax Expense	30600
	Income Tax Payable		30600
	(Income Taxes Payable)  ($90,000 X 34%)
2014	Income Tax Refund Receivable	71400
	Deferred Tax asset	26600
	Benefit due to loss carryback		71400*
	Benefit due to loss carryforward		26600**
	*[34% X $(120,000)] + [34% X $(90,000)] = $71,400
	**38% X ($280,000 – $120,000 – $90,000)= $26,600
2015	Income tax expense	83600
	Income tax payable		57000*
	Deferred Tax asset		26600
	*[($220,000 – $70,000) X 38%]

2.

Date	General Journal	Debit	Credit
2014	Income Tax Refund Receivable	71400
	Deferred Tax asset	26600
	Benefit due to loss carryback		71400
	Benefit due to loss carryforward		26600
	(To record refund.)
	Benefit due to loss carryforward	6650
	Allowance to reduce Deferred tax asset to Expected Relizable Value		6650
	(To record allowance.) 26,600x1/4
2015	Income tax expense	83600
	Income tax payable		57000
	Deferred Tax asset		26600
	(To record income taxes. )
	Allowance to reduce Deferred tax asset to Expected Relizable Value	6650
	Benefit due to loss carryforward		6650
	(To adjust allowance.)