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Kenyon Corporation began operations in 2009. Kenyon applies generally accepted accounting principles. Kenyon Corporation had levels...

Kenyon Corporation began operations in 2009. Kenyon applies generally accepted accounting principles. Kenyon Corporation had levels of pretax income (loss), was subject to the income tax rates and paid income taxes for the years 2009-2013 as indicated below. As you can see below Kenyon experienced a loss in 2014

Income                     Income

                                                     Pretax Book                Tax                          Taxes

                              Year               Income (Loss)              Rate                          Paid

                              2014               (600,000)                    30%

                              2013                  300,000                     25%                       75,000                      

                              2012                  200,000                     25%                       50,000

                              2011                  200,000                     20%                       40,000

                              2010                  100,000                     20%                       20,000

                              2009                  100,000                     20%                       20,000

For all years, Taxable Income = Pretax Book Income, and Loss for Tax Purposes = Pretax Book Loss, i.e., there were no permanent differences, there were no temporary differences. Kenyon applies losses as soon as possible. The enacted income tax rate is 35% for 2015 and beyond. As of 12-31-2014, Kenyon believes that no valuation allowance is necessary.

What will be the net loss reported by Kenyon on its 2014 income statement ?

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Answer #1

Solution :

Total operating loss for 2014 = $600,000

Loss carryback to 2012 = $200,000, income tax benefit = $200,000*25% = $50,000

Loss carryback to 2013 = $300,000 = $300,000, income tax benefit = $300,000 * 25% = $75,000

Total Income tax benefit due to loss carryback = $50,000 + $75,000 = $125,000

Loss to be carried forward = $600,000 - $500,000 = $100,000

Deferred tax assets for loss carry forward = $100,000 * 35% = $35,000

Total benefit due to loss carryback and carry forward = $125,000 + $35,000 = $160,000

Net loss reported by Kenyon on its 2014 income statement = $600,000 - $160,000 = $440,000

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