Question

Wynn Sheet Metal reported a net operating loss of $126,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 30%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

	Taxable Income			Tax Rates			Income Taxes Paid
2014	$	73,000		20	%		$	14,600
2015		83,000		20				16,600
2016		93,000		30				27,900
2017		73,000		40				29,200

Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. Wynn elects the carryback option.
2. Show the lower portion of the 2018 income statement that reports the income tax benefit of the net operating loss.

Answer 1

Solution 1:

Net Operating loss carryback	Amount (In '000)	Rate of Tax	Tax	Recorded as
Carried back - 2014	$0.0	20%	$0.00
Carried back - 2015	$0.0	20%	$0.00
Carried back - 2016	$93.0	30%	$27.90
Carried back - 2017	$33.0	40%	$13.20
Total Carryback	$126.0		$41.10	Income tax benefit

Adjusting Journal Entries - Wynn Sheet Metal
Event	Particulars	Debit (In '000)	Credit (In '000)
1	Receivables - Income Tax Refund	$41.10
	To Income tax benefit - Net Operating Loss		$41.10
	(Being income tax benefit due to loss carryback recorded)

Solution 2:

Income Statement - Wynn Sheet metal For the year ended December 31, 2018
Particulars	Amount (In'000)
Operating loss before income tax	-$126.00
Income tax benefit:
Tax refund from loss carryback	$41.10
Net Income (Loss)	-$84.90