Question

(NOL Carryforward, Valuation Account Needed)

Topper Company reported the following pretax financial income (loss) for the years 2018 through 2022:

2018 $ 70,000

2019 45,000

2020 (260,000)

2021 90,000

2022 215,000

Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 30% for 2018 through 2020, and 20% for 2021 and thereafter.

Instructions

(a) Prepare the journal entries for the years 2018 through 2022 to record income tax expense, income tax payable (refund- able), and the tax effects of the loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that 60 percent of the benefits of the loss carryforward will not be realized.

(b) Prepare the income tax section of the 2020 income statement beginning with the line “Income (loss) before income taxes.”

Answer 1

a)	Date	Particulars	Debit	Credit
	2018	Income tax expense(70000*30%)	21000
		income tax payable		21000
		( being income tax expense record for 2018 year)
	2019	Income tax expense (45000*30%)	13500
		income tax payable		13500
		( Being income tax expense record for 2019 year)
	2020	Income tax refund receivable	34500		(21000+13500)
		Deferred income tax assest(260000-70000-45000)*20%	29000
		Benefit due to loss carryback		34500
		benefit due to loss carryforward		29000
		(Being record refund)
	2020	benefit due to loss carryforward (29000*60%)	17400
		Allowance to reduce deferred tax assest		17400
		(to record the allowance)
	2021	Income tax expense(90000*20%)	18000
		Deferred income tax assest		18000
		( being income tax expense record for 2021 year)
	2022	Income tax expense(215000*20%)	43000
		income tax payable(215000-55000)*20%		32000
		Deferred income tax assest		11000
		(Record of income tax expense and set off deferred tax)
	2022	Allowance to reduce deferred tax assest	17400
		benefit due to loss carryforward		17400
		(reversal of allowance account)
b		Income Statement-2020
		Operating loss before income taxes		-260000
		Income tax benefit
		Benefit due to loss carryback(70000+45000)*30%	34500
		Benefit due to loss carryforward(29000*40%)	11600	46100
		Net income/(loss)		-213900