19-1

PREVIEW OF CHAPTER 19

Intermediate Accounting
16th Edition
Kieso ● Weygandt ● Warfield
19-2
 19 Accounting for Income
Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Understand the fundamentals 3 Explain the accounting for loss
of accounting for income carrybacks and loss
taxes. carryforwards.
2 Identify additional issues in
accounting for income taxes.

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 ACCOUNTING FOR INCOME TAXES

Corporations must file income tax returns following the

guidelines developed by the Internal Revenue Service (IRS).

Because GAAP and tax regulations differ in a number of ways,

the amounts reported for the following will differ:
 income tax expense (GAAP).
 income tax payable (Internal Revenue Code).

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 ACCOUNTING FOR INCOME TAXES

Financial Statements Tax Return

vs.

Pretax Financial Income  Taxable Income

GAAP Tax Code
Income Tax Expense  Income Taxes Payable

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 ACCOUNTING FOR INCOME TAXES

Illustration: Chelsea, Inc. reported revenues of $130,000 and

expenses of $60,000 in each of its first three years of
operations. For tax purposes, Chelsea reported the same
expenses to the IRS in each of the years. Chelsea reported
taxable revenues of $100,000 in 2017, $150,000 in 2018, and
$140,000 in 2019. What is the effect on the accounts of
reporting different amounts of revenue for GAAP versus tax?

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 Book vs. Tax Differences
ILLUSTRATION 19-2
GAAP Reporting 2017 2018 2019 Total

Revenues $130,000 $130,000 $130,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Pretax financial income $70,000 $70,000 $70,000 $210,000

Income tax expense (40%) $28,000 $28,000 $28,000 $84,000

ILLUSTRATION 19-3
Tax Reporting 2017 2018 2019 Total

Revenues $100,000 $150,000 $140,000 $390,000

Expenses 60,000 60,000 60,000 180,000
Taxable income $40,000 $90,000 $80,000 $210,000

Income tax payable (40%) $16,000 $36,000 $32,000 $84,000

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 Book vs. Tax Differences
ILLUSTRATION 19-4
Comparison 2017 2018 2019 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Income tax expense (40%) $28,000 $28,000 $28,000 $84,000

Are the differences accounted for in the financial statements? Yes

Year Reporting Requirement

2017 Deferred tax liability account increased to $12,000
2018 Deferred tax liability account reduced by $8,000
2019 Deferred tax liability account reduced by $4,000

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 Financial Reporting for 2017

Balance Sheet Income Statement

2017 2017
Assets:
Revenues:

Expenses:
Liabilities:
Deferred taxes 12,000
Income taxes payable 16,000
Income tax expense 28,000
Equity:
Net income (loss)

Where does the “deferred tax liability” get reported in the financial
statements?
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 Future Taxable and Deductible Amounts

A temporary difference is the difference between the tax basis of an

asset or liability and its reported (carrying or book) amount in the
financial statements that will result in taxable amounts or deductible
amounts in future years.

Future Taxable Amounts Future Deductible Amounts

Deferred Tax Liability represents Deferred Tax Asset represents the
the increase in taxes payable in increase in taxes refundable (or
future years as a result of taxable saved) in future years as a result of
temporary differences existing at deductible temporary differences
the end of the current year. existing at the end of the current
year.

Illustration 19-29 provides Examples of Temporary Differences

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 Future Taxable Amounts

Illustration: In Chelsea’s situation, the only difference between

the book basis and tax basis of the assets and liabilities relates to
accounts receivable that arose from revenue recognized for book
purposes. Chelsea reports accounts receivable at $30,000 in the
December 31, 2017, GAAP-basis balance sheet. However, the
receivables have a zero tax basis.

Illustration 19-5
Temporary Difference, Sales Revenue

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 Future Taxable Amounts

Illustration: Reversal of Temporary Difference, Chelsea Inc.

ILLUSTRATION 19-6

Chelsea assumes that it will collect the accounts receivable and report
the $30,000 collection as taxable revenues in future tax returns.
Chelsea does this by recording a deferred tax liability.

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 Future Taxable Amounts

Deferred Tax Liability

A deferred tax liability represents the increase in taxes payable
in future years as a result of taxable temporary differences
existing at the end of the current year.

ILLUSTRATION 19-4

2017 2018 2019 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

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 Deferred Tax Liability

Illustration: Because it is the first year of operations for Chelsea,

there is no deferred tax liability at the beginning of the year.
Chelsea computes the income tax expense for 2017 as follows:

ILLUSTRATION 19-9
Computation of Income Tax Expense, 2017

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 Deferred Tax Liability
ILLUSTRATION 19-4

2017 2018 2019 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Chelsea makes the following entry at the end of 2017 to record

income taxes.

Income Tax Expense 28,000

Income Taxes Payable 16,000
Deferred Tax Liability 12,000

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 Deferred Tax Liability
ILLUSTRATION 19-4

2017 2018 2019 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Chelsea makes the following entry at the end of 2018 to record

income taxes.

Income Tax Expense 28,000

Deferred Tax Liability 8,000
Income Taxes Payable 36,000

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 Deferred Tax Liability
ILLUSTRATION 19-4

2017 2018 2019 Total

Income tax expense (GAAP) $28,000 $28,000 $28,000 $84,000

Income tax payable (IRS) 16,000 36,000 32,000 84,000
Difference $12,000 $(8,000) $(4,000) $0

Chelsea makes the following entry at the end of 2019 to record

income taxes.

Income Tax Expense 28,000

Deferred Tax Liability 4,000
Income Taxes Payable 32,000

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 Deferred Tax Liability

The entry to record income taxes at the end of 2019 reduces the
Deferred Tax Liability by $4,000. The Deferred Tax Liability account
appears as follows at the end of 2019.

ILLUSTRATION 19-12
Deferred Tax Liability Account after Reversals

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 Financial Statement Effects
ILLUSTRATION 19-13
Balance Sheet Presentation,
Deferred Tax Liabilities

ILLUSTRATION 19-14
Income Statement Presentation,
Income Tax Expense

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 Financial Statement Effects

ILLUSTRATION 19-14
Income Statement
Presentation, Income Tax
Expense

ILLUSTRATION 19-15
Components of Income Tax Expense

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 Deferred Tax Liability

Illustration: Starfleet Corporation has one temporary difference at

the end of 2017 that will reverse and cause taxable amounts of
$55,000 in 2018, $60,000 in 2019, and $75,000 in 2020. Starfleet’s
pretax financial income for 2017 is $400,000, and the tax rate is 30%
for all years. There are no deferred taxes at the beginning of 2017.

Instructions

a) Compute taxable income and income taxes payable for 2017.

b) Prepare the journal entry to record income tax expense,

deferred income taxes, and income taxes payable for 2017.

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 Deferred Tax Liability

Illustration: Current Yr.

INCOME: 2017 2018 2019 2020
Financial income (GAAP) 400,000
Temporary Diff. (190,000) 55,000 60,000 75,000
Taxable income (IRS) a. 210,000 55,000 60,000 75,000
Tax rate 30% 30% 30% 30%
Income tax a. 63,000 16,500 18,000 22,500

b. Income Tax Expense (plug) 120,000

Income Taxes Payable 63,000
Deferred Tax Liability 57,000

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 WHAT DO THE NUMBERS MEAN? “REAL
WHAT’S YOUR LIABILITIES”
PRINCIPLE
Some analysts dismiss deferred tax liabilities when assessing the financial strength
of a company. But the FASB indicates that the deferred tax liability meets the
definition of a liability established in Statement of Financial Accounting Concepts
No. 6, “Elements of Financial Statements” because:
1. It results from a past transaction. In the Chelsea example, the company
performed services for customers and recognized revenue in 2017 for financial
reporting purposes but deferred it for tax purposes.
2. It is a present obligation. Taxable income in future periods will exceed pretax
financial income as a result of this temporary difference. Thus, a present
obligation exists.
3. It represents a future sacrifice. Taxable income and taxes due in future
periods will result from past events. The payment of these taxes when they
come due is the future sacrifice. A set of studies indicates that deferred taxes do
provide incremental information about future tax payments and that the market
views deferred tax assets and liabilities similarly to other assets and liabilities.
Sources: B. Ayers, “Deferred Tax Accounting Under SFAS No. 109: An Empirical Investigation of Its Incremental Value-
Relevance Relative to APB No. 11,” The Accounting Review (April 1998); and R. Laux, “The Association Between
Deferred Tax Assets and Liabilities and Future Tax Payments,” The Accounting Review (February 2013).

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 Future Deductible Amounts

Illustration: During 2017, Cunningham Inc. estimated its warranty

costs related to the sale of microwave ovens to be $500,000, paid
evenly over the next two years. For book purposes, in 2017
Cunningham reported warranty expense and a related estimated
liability for warranties of $500,000 in its financial statements. For
tax purposes, the warranty tax deduction is not allowed until paid.

ILLUSTRATION 19-16
Temporary Difference, Warranty Liability

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 Future Deductible Amounts

Illustration: Reversal of Temporary Difference.

ILLUSTRATION 19-17

When Cunningham pays the warranty liability, it reports an expense

(deductible amount) for tax purposes. Cunningham reports this future
tax benefit in the December 31, 2017, balance sheet as a deferred tax
asset.
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 Future Deductible Amounts

Deferred Tax Asset

A deferred tax asset represents the increase in taxes
refundable (or saved) in future years as a result of deductible
temporary differences existing at the end of the current year.

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 Deferred Tax Asset

Illustration: Hunt Company has revenues of $900,000 for both

2017 and 2018. It also has operating expenses of $400,000 for
each of these years. In addition, Hunt accrues a loss and related
liability of $50,000 for financial reporting purposes because of
pending litigation. Hunt cannot deduct this amount for tax purposes
until it pays the liability, expected in 2018. As a result, a deductible
amount will occur in 2018 when Hunt settles the liability, causing
taxable income to be lower than pretax financial information.
Illustration 19-18 shows the GAAP and tax reporting over the two
years.

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 ILLUSTRATION 19-18
GAAP and Tax Reporting, Hunt Company

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 Deferred Tax Asset

Illustration: Hunt can compute the deferred tax asset by preparing

a schedule that indicates the future deductible amounts due to
deductible temporary differences.

ILLUSTRATION 19-20
Schedule of Future Deductible Amounts

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 Deferred Tax Asset

Assume that 2017 is Hunt’s first year of operations, and income tax
payable is $200,000, compute income tax expense.
ILLUSTRATION 19-21

Prepare the entry at the end of 2017 to record income taxes.

Income Tax Expense 180,000
Deferred Tax Asset 20,000
Income Taxes Payable 200,000
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 Deferred Tax Asset

Computation of Income Tax Expense for 2018.

ILLUSTRATION 19-22

Prepare the entry at the end of 2018 to record income taxes.

Income Tax Expense 200,000
Deferred Tax Asset 20,000
Income Taxes Payable 180,000
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 Financial Statement Effects
ILLUSTRATION 19-23
Balance Sheet Presentation,
Deferred Tax Asset

ILLUSTRATION 19-24
Income Statement
Presentation, Deferred
Tax Asset

19-32
 Financial Statement Effects

The entry to record income taxes at the end of 2018 reduces the
Deferred Tax Asset by $20,000.

ILLUSTRATION 19-25
Deferred Tax Asset Account after Reversals

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 Deferred Tax Asset

Illustration: Columbia Corporation has one temporary difference at

the end of 2017 that will reverse and cause deductible amounts of
$50,000 in 2018, $65,000 in 2019, and $40,000 in 2020. Columbia’s
pretax financial income for 2017 is $200,000 and the tax rate is 34%
for all years. There are no deferred taxes at the beginning of 2017.
Columbia expects to be profitable in the future.
Instructions
a) Compute taxable income and income taxes payable for 2017.
b) Prepare the journal entry to record income tax expense, deferred
income taxes, and income taxes payable for 2017.

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 Deferred Tax Asset

Illustration Current Yr.

INCOME: 2017 2018 2019 2020
Financial income (GAAP) 200,000
Temporary Diff. 155,000 (50,000) (65,000) (40,000)
Taxable income (IRS) a. 355,000 (50,000) (65,000) (40,000)
Tax rate 34% 34% 34% 34%
Income tax a. 120,700 (17,000) (22,100) (13,600)

b. Income Tax Expense 68,000

Deferred Tax Asset 52,700
Income Taxes Payable 120,700

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 WHAT DO THE NUMBERS MEAN? WHAT’S YOUR“REAL ASSETS”
PRINCIPLE

A key issue in accounting for income taxes is whether a company

should recognize a deferred tax asset in the financial records. Based
on the conceptual definition of an asset, a deferred tax asset meets the
three main conditions for an item to be recognized as an asset:
1. It results from a past transaction. In the Hunt example, the
accrual of the loss contingency is the past event that gives rise to a
future deductible temporary difference.
2. It gives rise to a probable benefit in the future. Taxable income
exceeds pretax financial income in the current year (2017).
However, in the next year the exact opposite occurs. That is, taxable
income is lower than pretax financial income. Because this
deductible temporary difference reduces taxes payable in the future,
a probable future benefit exists at the end of the current period.
3. The entity controls access to the benefits. Hunt can obtain the
benefit of existing deductible temporary differences by reducing its
19-36 (continued) LO 1
 WHAT DO THE NUMBERS MEAN? WHAT’S YOUR“REAL ASSETS”
PRINCIPLE

taxes payable in the future. Hunt has the exclusive right to that benefit
and can control others’ access to it. Market analysts’ reactions to the
write-off of deferred tax assets also supports their treatment as assets.
When Twitter reported that it was writing off its net U.S deferred assets,
analysts believed that Twitter was signaling that it would not realize
the future benefits of these tax deductions. Thus, Twitter should write
down these assets like other assets.

Sources: J. Weil and S. Liesman, “Stock Gurus Disregard Most Big Write-Offs but They
Often Hold Vital Clues to Outlook,” Wall Street Journal Online (December 31, 2001); and
V. Fleisher, “Why Twitter May Have to Pay Income Taxes One Day,” The New York Times
(November 6, 2013).

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 ACCOUNTING FOR INCOME TAXES

Deferred Tax Asset—Valuation Allowance

A company should reduce a deferred tax asset by a valuation
allowance if it is more likely than not that it will not realize
some portion or all of the deferred tax asset.

“More likely than not” means a level of likelihood of at least

slightly more than 50 percent.

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 Deferred Tax Asset—Valuation Allowance

19-39
 Deferred Tax Asset—Valuation Allowance

19-40
 19 Accounting for Income
Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Understand the fundamentals of 3 Explain the accounting for loss
accounting for income taxes. carrybacks and loss
2 Identify additional issues in carryforwards.
accounting for income taxes.

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 ADDITIONAL CONSIDERATIONS

Income Statement Presentation

Formula to Compute Income Tax Expense ILLUSTRATION 19-27

Income Taxes Change In Income Tax

Payable Or + Deferred Income = Expense or
-
Refundable Taxes Benefit

In the income statement or in the notes to the financial

statements, a company should disclose the significant
components of income tax expense (current and deferred).

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 Income Statement Presentation

Given the previous information related to Chelsea Inc.,

Chelsea reports its income statement as follows.

ILLUSTRATION 19-28
19-43 Income Statement Presentation of Income Tax Expense LO 2
 ACCOUNTING FOR INCOME TAXES

Specific Differences
Temporary Differences
 Taxable temporary differences - Deferred tax liability
 Deductible temporary differences - Deferred tax
Asset

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 Temporary Differences Illustration 19-29
Examples of Temporary
Differences

Revenues or gains are taxable after they are recognized in financial income.

An asset (e.g., accounts receivable or investment) may be recognized for revenues or

gains that will result in taxable amounts in future years when the asset is recovered.
Examples:
1. Sales accounted for on the accrual basis for financial reporting purposes and on the
installment (cash) basis for tax purposes.
2. Contracts accounted for under the percentage-of-completion method for financial
reporting purposes and a portion of related gross profit deferred for tax purposes.
3. Investments accounted for under the equity method for financial reporting purposes
and under the cost method for tax purposes.
4. Gain on involuntary conversion of nonmonetary asset which is recognized for
financial reporting purposes but deferred for tax purposes.
5. Unrealized holding gains for financial reporting purposes (including use of the fair
value option), but deferred for tax purposes.

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 Temporary Differences Illustration 19-29
Examples of Temporary
Differences

Expenses or losses are deductible after they are recognized in financial income.

A liability (or contra asset) may be recognized for expenses or losses that will result in
deductible amounts in future years when the liability is settled. Examples:
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
3. Litigation accruals.
4. Bad debt expense recognized using the allowance method for financial reporting
purposes; direct write-off method used for tax purposes.
5. Stock-based compensation expense.
6. Unrealized holding losses for financial reporting purposes (including use of the fair
value option), but deferred for tax purposes.

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 Temporary Differences Illustration 19-29
Examples of Temporary
Differences

Revenues or gains are taxable before they are recognized in financial income.

A liability may be recognized for an advance payment for goods or services to be

provided in future years. For tax purposes, the advance payment is included in taxable
income upon the receipt of cash. Future sacrifices to provide goods or services (or
future refunds to those who cancel their orders) that settle the liability will result in
deductible amounts in future years. Examples:
1. Subscriptions received in advance.
2. Advance rental receipts.
3. Sales and leasebacks for financial reporting purposes (income deferral) but
reported as sales for tax purposes.
4. Prepaid contracts and royalties received in advance.

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 Temporary Differences Illustration 19-29
Examples of Temporary
Differences

Expenses or losses are deductible before they are recognized in financial income.

The cost of an asset may have been deducted for tax purposes faster than it was
expensed for financial reporting purposes. Amounts received upon future recovery of
the amount of the asset for financial reporting (through use or sale) will exceed the
remaining tax basis of the asset and thereby result in taxable amounts in future
years. Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
3. Prepaid expenses that are deducted on the tax return in the period paid.

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 Specific Differences

Originating and Reversing Aspects of Temporary

Differences.
 Originating temporary difference is the initial difference
between the book basis and the tax basis of an asset or
liability.
 Reversing difference occurs when eliminating a temporary
difference that originated in prior periods and then removing
the related tax effect from the deferred tax account.

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 Specific Differences

Permanent differences result from items that (1) enter into

pretax financial income but never into taxable income or (2)
enter into taxable income but never into pretax financial income.

Permanent differences affect only the period in which they occur.

They do not give rise to future taxable or deductible amounts.
There are no deferred tax consequences to be recognized.

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 Permanent Differences ILLUSTRATION 19-31
Examples of Permanent
Differences

Items are recognized for financial reporting purposes but not for tax purposes.

Examples:
1. Interest received on state and municipal obligations.
2. Expenses incurred in obtaining tax-exempt income.
3. Proceeds from life insurance carried by the company on key officers or employees.
4. Premiums paid for life insurance carried by the company on key officers or
employees (company is beneficiary).
5. Fines and expenses resulting from a violation of law.

Items are recognized for tax purposes but not for financial reporting purposes.

Examples:
1. “Percentage depletion” of natural resources in excess of their cost.
2. The deduction for dividends received from U.S. corporations, generally 70% or 80%.

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 Specific Differences
Illustration
Do the following generate:
 Future Deductible Amount = Deferred Tax Asset
 Future Taxable Amount = Deferred Tax Liability
 Permanent Difference

1. The MACRS depreciation system is used for tax Future Taxable

purposes, and the straight-line depreciation method Amount
is used for financial reporting purposes. Liability

2. A landlord collects some rents in advance. Rents Future Deductible

received are taxable in the period when they are Amount
Asset
received.

3. Expenses are incurred in obtaining tax-exempt Permanent

Difference
income.

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 Specific Differences
Illustration
Do the following generate:
 Future Deductible Amount = Deferred Tax Asset
 Future Taxable Amount = Deferred Tax Liability
 Permanent Difference

Future Deductible
4. Costs of guarantees and warranties are estimated Amount
and accrued for financial reporting purposes. Asset

5. Installment sales of investments are accounted for

Future Taxable
by the accrual method for financial reporting Amount
purposes and the installment-sales method for tax Liability
purposes.

6. Proceeds are received from a life insurance Permanent

company because of the death of a key officer (the Difference
company carries a policy on key officers).
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 Specific Differences

19-54
 Specific Differences

19-55
 ACCOUNTING FOR INCOME TAXES

Tax Rate Considerations

Future Tax Rates
A company must consider presently enacted changes in the tax
rate that become effective for a particular future year(s) when
determining the tax rate to apply to existing temporary
differences.

In determining the appropriate enacted tax rate for a given year,

companies must use the average tax rate.

19-56 LO 2
 19 Accounting for Income
Taxes
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Understand the fundamentals of 3 Explain the accounting for loss
accounting for income taxes. carrybacks and loss
2 Identify additional issues in carryforwards.
accounting for income taxes.

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 NET OPERATING LOSSES

Net operating loss (NOL) = tax-deductible expenses exceed

taxable revenues.

The federal tax laws permit taxpayers to use the losses of one
year to offset the profits of other years (loss carryback and
loss carryforward).

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 NET OPERATING LOSSES

Loss Carryback
 Back 2 years and forward 20 years
 Losses must be applied to earliest year first

ILLUSTRATION 19-36
Loss Carryback Procedure

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 NET OPERATING LOSSES

Loss Carryforward
 May elect to forgo loss carryback and
 Carryforward losses 20 years

ILLUSTRATION 19-37
Loss Carryforward Procedure

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 NET OPERATING LOSSES

Illustration: Conlin Corporation had the following tax information.

Taxable Tax Taxes

Year Income Rate Paid
2015 $ 300,000 35% $ 105,000
2016 325,000 30% 97,500
2017 400,000 30% 120,000

In 2018 Conlin suffered a net operating loss of $480,000, which it

elected to carry back. The 2018 enacted tax rate is 29%.
Prepare Conlin’s entry to record the effect of the loss carryback.

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 NET OPERATING LOSSES
Illustration: 2015 2016 2017 2018
Financial income $ 300,000 $ 325,000 $ 400,000
Difference
Taxable income (loss) 300,000 325,000 400,000 (480,000)
Rate 35% 30% 30% 29%
Income tax $ 105,000 $ 97,500 $ 120,000

NOL Schedule
Taxable income $ 300,000 $ 325,000 $ 400,000 (480,000)
Carryback (325,000) (155,000) 480,000
Taxable income 300,000 - 245,000 -
Rate 35% 30% 30% 29%
Income tax (revised) $ 105,000 $ - $ 73,500 -

Refund $ 97,500 $ 46,500 $144,000

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 NET OPERATING LOSSES
Illustration: 2015 2016 2017 2018
NOL Schedule
Taxable income $ 300,000 $ 325,000 $ 400,000 (480,000)
Carryback (325,000) (155,000) 480,000
Taxable income 300,000 - 245,000 -
Rate 35% 30% 30% 29%
Income tax (revised) $ 105,000 $ - $ 73,500 -

Refund $ 97,500 $ 46,500

Journal Entry for 2018

Income Tax Refund Receivable 144,000

Benefit Due to Loss Carryback 144,000

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 NET OPERATING LOSSES

Illustration: Rode Inc. incurred a net operating loss of $500,000

in 2017. Combined income for 2015 and 2016 was $350,000. The
tax rate for all years is 40%. Rode elects the carryback option.
Prepare the journal entries to record the benefits of the loss
carryback and the loss carryforward.

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 NET OPERATING LOSSES

Illustration: 2015-2016 2017 2018

Financial income $ 350,000
Difference
Taxable income (loss) 350,000 (500,000)
Rate 40% 40%
Income tax $ 140,000

NOL Schedule
Taxable income $ 350,000 (500,000)
Carryback (350,000) 350,000
Taxable income - (150,000)
Rate 40% 40%
Income tax (revised) $ - (60,000)

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 NET OPERATING LOSSES

Illustration: 2015-2016 2017 2018

Financial income $ 350,000
Difference
Taxable income (loss) 350,000 (500,000)
Rate 40% 40%
Income tax $ 140,000

NOL Schedule
Journal Entries for 2017
Taxable income $ 350,000 (500,000)
Income Tax Refund Receivable
Carryback 140,000350,000
(350,000)
Taxable income
Benefit Due to Loss Carryback- (150,000)
140,000
Rate 40% 40%
Income tax (revised) $ - (60,000)

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 NET OPERATING LOSSES

Illustration: 2015-2016 2017 2018

NOL Schedule
Taxable income $ 350,000 (500,000)
Carryback (350,000) 350,000
Taxable income - (150,000)
Rate 40% 40%
Income tax (revised) $ - (60,000)

Journal Entries for 2017

Deferred Tax Asset 60,000

Benefit Due to Loss Carryforward 60,000

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 NET OPERATING LOSSES

Illustration: Rode Inc. incurred a net operating loss of $500,000

in 2017. Combined income for 2015 and 2016 was $350,000. The
tax rate for all years is 40%. Rode elects the carryback option.
Assume that it is more likely than not that the entire net operating
loss carryforward will not be realized in future years. Prepare all
the journal entries necessary at the end of 2017.

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 NET OPERATING LOSSES

Journal Entries for 2017

Income Tax Refund Receivable 140,000

Benefit Due to Loss Carryback 140,000

Deferred Tax Asset 60,000

Benefit Due to Loss Carryforward 60,000

Benefit Due to Loss Carryforward 60,000

Allowance for Deferred Tax Asset 60,000

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 COPYRIGHT

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