Question

Use the information below to answer 3 and 4. In 2018, Cookies n’ Cream reported a loss for book purposes of ($150,000). During 2018, Cookies n’ Cream had an estimated loss of $20,000 from a loss contingency. They also sold an investment during 2018 for which the accrued an unrealized gain of $10,000 in 2017 from increasing investments to fair value. Cookies n’ Cream also ha $5,000 in expenses for insurance premiums for key executives. Cookies n’ Cream had no taxable income in 2017. The tax rate is 40%. 3. What is cookies n’ Cream’s taxable loss? a. ($135,000) b. ($185,000) c. ($125,000) d. ($115,000) 4. What is Cookies n’ Cream’s net loss to be reported on the income statement?

Answer 1

Solution a:

Computation of taxable loss
Particulars	Amount
Loss for book purpose	-$150,000.00
Add: Estimated loss from loss contigency	$20,000.00
Less: Unrealized gain on investment	$10,000.00
Add: Insurance premium for key executives	$5,000.00
Taxable loss	-$135,000.00

Hence option a is correct.

Solution b:

Deferred tax assets on taxable loss to be carried forward = $135000*40% = $54,000

Deferred tax assets on temporary differences = 20000*40% = $8,000

Deferred tax liability on temporary difference = 10000*40% = $4,000

Total income tax benefit for the year = $54,000 + $8,000 - $4,000 = $58,000

Net loss to be reported on income statement = -$150,000 + $58,000 = ($92,000)