Question

Problem Four

Alto Company incurs a net operating loss in 2019 of $4,000,000. The loss is the same for pretax accounting income and for tax purposes (no temporary or permanent differences). Under income tax law, losses may only be carried forward to later years (carrybacks are not permitted). Alto incurs pretax accounting and taxable income of $6,000,000 in 2020 and all of the loss carryforward is used to offset some of the 2020 income on the tax return that year. Alto’s income tax rate is 20% for all years.

Required:

1. Prepare the accounting entries for 2019 to account for the loss carryforward.

2. Prepare the accounting entries for 2020 to account for taxes that year.

3. Explain when a valuation allowance may have been proper to record in 2019.

Answer 1

Solution 1:

Journal Entries - Alto Company
Date	Particulars	Debit	Credit
31-Dec-19	Deferred Tax Assets Dr	$800,000.00
	To Income tax benefit		$800,000.00
	(Being deferred tax assets recorded for loss carry forward)

Solution 2:

Journal Entries - Alto Company
Date	Particulars	Debit	Credit
31-Dec-20	Incomet tax expense Dr	$1,200,000.00
	To Income taxes payable		$400,000.00
	To Deferred tax assets		$800,000.00
	(To record income tax expense for 2020)

solution 3:

Valuation allowance for deferred tax assets is recognized when it is probable that some of deferred tax assets will not realized in future.