Question

Note, the following information GiddyUp is the same as in the previous question. GiddyUp, a leading manufacturer of horse carriages experienced its first loss in decades, reporting an $8 million pretax loss in 2016. GiddyUp faces a 40% tax rate. In 2017, GiddyUp was able to turn things around and generate a $3 million pretax profit.

Which of the following statements is most accurate assuming that a) GiddyUp waived its carryback option in 2016 and b) no NOLs are available other than the ones generated in 2016?

A GiddyUp will have deferred tax assets of $2.0 million at year-end 2017.

B GiddyUp will have deferred tax assets of $5.0 million at year-end 2017.

C GiddyUp will have no deferred tax assets at year-end 2017.

D GiddyUp will receive a tax refund of $1.2m in 2017.

E GiddyUp will report a tax expense of $0 in 2017.

Answer 1

Considering the set of events

Year 2016 - $ 8 mn losses

Year 2017 - $ 3 mn profits

It has been provided that

a) GiddyUp waived its carryback option in 2016 and;

b) no NOLs are available other than the ones generated in 2016

Further assuming that 40% tax rate remains same in Year 2017

Giddy up will be having Deferred Tax Asset of $ 2 mn, as existing profits of $3 mn will reduce the brought forward losses of $ 8 mn, reducing it to $5 mn and thus applying the Tax rate of 40%, Deferred Tax rate of $2 mn ( $5mn x 40%) shall be available.

Hence option A