Question

Chapter 16-Problem 5. Wynn Sheet Metal reported an operating loss of $174,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

                Taxable                Tax              Income Taxes

                Income                 Rates                Paid

2014       $67,000                 30%               $20,100

2015       77,000                  30                    23,100

2016       87,000               40                    34,800

2017        67,000                45                   30,150

Required:

1. Complete the following table given below and prepare the journal entry to recognize the income tax benefit of the 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 operating loss.

Complete the following table given below to record income taxes. (Enter your answers in thousands. Round your answers to two decimal places. Leave no cell blank, enter “0” wherever applicable.)

Operating loss carryback			Rate %		Tax $	Recorded as:
Carried back-2014		x		=
Carried back-2015		x		=
Carried back-2016		x		=
Carried back-2017		x		=
Total carryback
Operating loss carryforward
Carried forward		x		=

Record 2018 income tax benefit from operating loss.

Event_____     General Journal___________   Debit_________   Credit_______

Show the lower portion of the 2018 income statement that reports the income tax benefit of the operating loss.   Income tax benefit__________________________

Answer 1

Solution:

Net Operating loss carryback	Amount (In '000)	Rate of Tax	Tax	Recorded as
Carried back - 2014	$0.0	30%	$0.0
Carried back - 2015	$0.0	30%	$0.0
Carried back - 2016	$87.0	40%	$34.8
Carried back - 2017	$67.0	45%	$30.2
Total Carryback	$154.0		$65.0	Income tax benefit
Deferred Tax Assets	Amount (In '000)	Rate of Tax	Tax
Loss Carried forward	$20.00	25%	$5.00	Deferred tax assets

Adjusting Journal Entries - Wynn Sheet Metal
Event	Particulars	Debit (In '000)	Credit (In '000)
1	Receivables - Income Tax Refund	$65.00
	Deferred Tax Assets Dr	$5.00
	To Income tax benefit - Net Operating Loss		$70.00
	(Being income tax benefit due to loss carryback recorded)
2	Deferred Tax Assets Dr	$8.00
	To Income tax benefit - Deferred Tax Assets		$8.00
	(Being deferred tax assets recorded for loss carry forward)

Income Statement - Wynn Sheet metal For the year ended December 31, 2018
Particulars		Amount (In'000)
Operating loss before income tax		-$174.00
Income tax benefit:
Income tax benefit - Loss Carryback	$65.00
Income tax benefit - Deferred Tax Assets	$5.00	$70.00
Net Income (Loss)		-$104.00