Question

Wynn Sheet Metal reported an operating loss of $194,000 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 Income Tax Rates Income Taxes Paid 2014 $ 77,000 30 % $ 23,100 2015 87,000 30 26,100 2016 97,000 40 38,800 2017 77,000 45 34,650 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.

Answer 1

Solution 1:

Total operating loss for 2018 = $194,000

Loss carryback to 2016 = $97,000, income tax benefit = $97,000*40% = $38,800

Loss carryback to 2017 = $77,000 income tax benefit = $77,000 * 45% = $34,650

Total Income tax benefit due to loss carryback = $38800 + $34,650 = $73,450

Loss carry forward = $194,000 - $97,000 - $77,000 = $20,000

Deferred tax assets on loss carryforward = $20,000*40% = $8,000

Adjusting Journal Entries - Wynn Sheet Metal
Event	Particulars	Debit	Credit
1	Receivables - Income Tax Refund	$73,450.00
	To Income tax benefit - Net Operating Loss		$73,450.00
	(Being income tax benefit due to loss carryback recorded)
2	Deferred Tax Assets Dr	$8,000.00
	To Income tax benefit - Deferred Tax Assets		$8,000.00
	(Being deferred tax assets recorded for loss carry forward)

Solution 2:

Income Statement - Wynn Sheet metal For the year ended December 31, 2018
Particulars		Amount
Operating loss before income tax		-$194,000.00
Income tax benefit:
Income tax benefit - Loss Carryback	73450
Income tax benefit - Deferred Tax Assets	8000	$81,450.00
Net Loss		-$112,550.00