Question

In formation for 37,38 and 39. Vintage Car Corporation has pretax financial income (or loss) equal to taxable income (or loss) from 2015 through 2021 as follows.

Income (loss) Tax Rate

2015 $40,000 40%

2016 $63,000 40%

2017 36,000 30%

2018 (179,000) 35%

2019 85,000 40%

2020 59,000 40%

2021 (135,000) 40%

Pretax financial income (loss) and taxable income (loss) were the same for all years since Vintage Car has been in business. Assume the carryback provision is employed for net operating losses. In recording the benefits of a loss carryforward, assume that it is more likely than not that the related benefits will be realized.

37.What is the amount of deferred tax asset to be recognized in 2018, if there is no valuation allowance?

A. 32,000

B. -0-

C. 80,000

D. 28,000

What net income (loss) is reported in 2018 ?

A. (179,000)

b. (111,111)

c. (147,000)

d - 0-

For 2019, what is the amount of current income tax expense?

a. $0

b. 2,000

c 34,000

d 85,000

Answer 1

Amount of deferred tax asset to be recognized in 2018 - Option A i.e. 32,000

Reason - Applying carryback provions which limit carryback maximum to two years to set off against previous year Incomes amounts to (36000+ 63000) = 99000. Balance loss carried forward - 179000-99000 = 80000

Def Tax rate of 40% applied on same --> 32000 OPTION A

-------------------------------------------------------------------------------------------------------

Net Income / Loss reported in 2018 will be Option - C

Reason - Deffered Tax Asset as calculated above gets credited to P&L reducing the loss to that extent

(179000) + 32000 = (147000)

-------------------------------------------------------------------------------------------------------

Tax Expense for 2019 shall be - option b i.e. 2000

Reason - Total Income of 2019 is 85000 against which brought forward loss of 2018 shall be setoff to the extent of

80000.Taxable portion of Income becomes 5000 (85000-80000).Tax rate of 40% applied brings tax expense as 2000.