Question

Below are the reported profits and losses of Amherst Company for the past several years along with their tax rates on income reported.

                             Income                                            Tax rate
2014                    $100,000                                         35%
2015                    $ 20,000                                         40%
2016                    $100,000                                         35%
2017                    $(250,000)                                      35%
2018                    $85,000                                           21%
2019                    unknown                                        21%

Amherst elects to use both carry back and carry forward procedures with no valuation allowance and strongly anticipates future profits to recover losses.

1. Record the tax effect of the above in 2017.

                                                                                                                                  Dr.                              Cr.

2. Show the income tax section and loss section of the income statement for 2017.

3. Record the tax effect of the above in 2018.
                                                                                                                                    Dr.                       Cr.

Answer 1

Solution :

( a )

Journal Entries

• To record the income tax benefit for 2017

Account Title	Explanation	Debit	Credit
Income Tax Refund Recievable	( 20,000 * 40% ) + ( 1,00,000 * 35% )	$43,000
Deferred Tax Assets	( 2,50,000 - 1,20,000 ) * 21%	$27,300
Benefit due to Loss Carryback			$43,000
Benefit due to Loss Carryforward			$27,300

( b )

Income Statement - ( Partial )

• For the Year Ended December 31 , 2017

Operating loss before income taxes	- 2,50,000
Income tax benefit :
Benefit due to Loss Carryback	$43,500
Benefit due to Loss Carryforward	$27,300
Net Income / - Loss	-1,79,700

( c )

• To record the income tax expense for 2018

Account Title	Explanation	Debit	Creditt
Income Tax Expense	( 85,000 * 21% )	$17,850
Deferred Tax Assets			$17,850

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