Question

Meyer reported the following pretax financial income (loss) for the years 2012-2016

2012 $240,000

2013 200,000

2014 150,000

2015 (500,000)

2016 180,000

pretax financial income (loss) and taxable income (loss) were the same for all the years involved. The enacted tax rate was 34% for 2012 and 2013 and 38% for 2014-2016. Assume the carryback provision is used first for net operating losses. In 2015, based on the weight of available evidence, it is more likely than not that one-fifth of the benefits of the loss carryforward will not be realized.

Prepare the journal entries for 2015 ?

Answer 1

Solution:

Net Operating loss carryback	Amount	Rate of Tax	Tax	Recorded as
Carried back - 2012	$0.00	34%	$0.00
Carried back - 2013	$200,000.00	34%	$68,000.00
Carried back - 2014	$150,000.00	38%	$57,000.00
Total Carryback	$350,000.00		$125,000.00	Income tax benefit
Net Operating loss Carryforward
Carried forward	$150,000.00
Realisable benefits of loss carry forward	$120,000.00	38%	$45,600.00	Deferred tax assets

Adjusting Journal Entries - Meyer
Event	Particulars	Debit	Credit
1	Receivables - Income Tax Refund	$125,000.00
	To Income tax benefit - Net Operating Loss		$125,000.00
	(Being income tax benefit due to loss carryback recorded)
2	Deferred Tax Assets Dr	$45,600.00
	To Income tax benefit - Deferred Tax Assets		$45,600.00
	(Being deferred tax assets recorded for loss carry forward)