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Q25E.

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Intermediate Accounting (Kieso)
Found in: Page 1101

Short Answer

Meyer reported the following pretax financial income (loss) for the years 2015–2019. 2015 $240,000 2016 350,000 2017 120,000 2018 (570,000) 2019 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 2015 and 2016, and 40% for 2017–2019. Assume the carryback provision is used for the net operating losses. Instructions (a) Prepare the journal entries for the years 2017–2019 to record the income tax expense, income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that 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. (b) Prepare the income tax section of the 2018 income statement beginning with the line “Income (loss) before income taxes.”

Taxable income is the amount of income of an organization on which the government will impose the tax. It is calculated by deducting the necessary deductions under the tax regime.

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Step by Step Solution

(a) Journal Entries

Date

Particulars

Debit

Credit

2017

Income tax expense

$48,000

Income tax payable

$48,000

(To record the tax expense)

2018

Income tax refund receivables

$167,000

Deferred tax asset

$40,000

Benefit due to loss carryback

$167,000

Benefit due to loss carryforward

$40,000

(To record the loss)

2018

Benefit due to loss carryforward

$8,000

Allowance to reduce deferred tax asset to expected realizable value

$8,000

(To record the allowance)

2019

Income tax expense

$72,000

Income tax payable

$32,000

Deferred tax asset

$40,000

(To record the tax payable)

2019

Allowance to reduce deferred tax asset to expected realizable value

$8,000

Benefit due to loss carryforward

$8,000

(To record the loss)

(b) Income tax section under the income statement

Income Statement

Particulars

Amount

Loss before income taxes

($570,000)

Less: Income tax benefit

Carryback

$167,000

Carryforward

$32,000

Net Loss

($371,000)

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