Question

The pretax financial income (or loss) figures for Shamrock Company are as follows.

2015		$157,000
2016		233,000
2017		77,000
2018		(157,000	)
2019		(404,000	)
2020		125,000
2021		95,000

Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 25% tax rate for 2015 and 2016 and a 20% tax rate for the remaining years.

Prepare the journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Answer 1

Answer :-

Journal entries for the years 2017 to 2021 to record income tax expense and the effects of the net operating loss carryforwards are as follows :-

Date	Particular	Debit $	Credit $
2017	Income tax expenses A/c Dr. (77,000 x 20%)	$15,400
	Income tax payable A/c		$15,400
2018	Income tax refund Receivable A/c Dr.	$39,250
	To Benefit due to loss carry-back A/c		$39,250
	(Note -1)
2019	Income tax refund receivable A/c. Dr.	$15,400
	To Benefit due to loss carry-back A/c		$15,400
	Deferred tax assets A/c Dr.	$65,400
	To Benefit due to loss carry forward A/c		$65,400
	(Note -2)
2020	Income Tax expenses A/c Dr.(125,000 × 20%)	$ 25,000
	To Deferred tax assets A/c		$25,000
2021	Income Tax expenses A/c Dr.(95,000 x 20%)	$19,000
	To Deferred tax assets A/c		$19,000

Note 1 :-

In 2018 - Net operating loss ($157,000)

Loss carryback 2016 - 157,000 × 25% tax rate of 2016 = $39,250

Note 2 :-

In 2019- Net Operating loss is ($404,000)

Loss carryback 2017 - $77,000 × 20% = $15,400

Since in 2018 there is also Net Operating loss then the remaining Net Operating loss of $327,000 ( =$404,000 - $77,000) is carryforwards to future years .

Loss carryforwards - $327,000 × 20% = $65,400