Question

Tobac Company reported an operating loss of $132,000 for financial reporting and tax purposes in 2013. The enacted tax rate is 40% for 2013 an all future years. Assume that Tobac elects loss carryback. Taxable income, tax rates, and taxes paid for the four preceding years are as follows:

	Taxable Income	Tax Rate	Taxes Paid
2009	30,000	30%	9,000
2010	35,000	35%	10,500
2011	42,000	35%	14,700
2012	40,000	40%	16,000

Tobac concludes that is more likely than not that 50% of any loss carry-forward will not be used in future years.

Required:

1. Prepare all the necessary journal entries relative to tax accounting matters for 2013.

2. Prepare the income tax section of the income statement for 2013.

3. Assume that in 2014, Tobac has book taxable income of $200,000. Prepare the necessary journal entries to account or taxes in 2014.

Answer 1

1. Journal entry for the 2013 -

Loss carryback -2012, 2011 and 2010 will be completely utilised and 2009 will be partially utilised

	DR	CR
Income tax liability	41200
Income tax expense		41200

Incomee tax receipt of current year -

	DR	CR
Income tax receivable	11600
Income tax receipt		11600

2. Income tax section -

Income Tax section
Current Income Tax expense/(receipt) (132000*40%)	-52800
Previous year income tax utilised	41200
Income tax receipt	-11600

3. In 2014, taxable income of 200,000, necessary entries would be -

Income tax expense calculated as - 200,000*40%= 80,000

	DR	CR
Income tax expense	80000
Income tax payable		80000

Previous year reversal of income tax receivable -

	DR	CR
Income tax payable	11600
Income tax receivable		11600