SpamelaHamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.) Income (Loss) Tax Rate 2009 \( 29,000 30% 2010 40,000 30 2011 17,000 35 2012 48,000 50 2013 (150,000) 40 2014 90,000 40 2015 30,000 40 2016 105,000 40 2017 (60,000) 45 Year Pretax Income (Loss) Tax Rate 2015 \)120,000 34% 2016 90,000 34 2017 (280,000) 38 2018 220,000 38 The tax rates listed were all enacted by the beginning of 2015. Instructions (a) Prepare the journal entries for the years 2015–2018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future. (b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.” (c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized. (d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line “Operating loss before income taxes.”

Date

Particulars

Debit

Credit

2015

Income tax expense $\left(\$120,000\times 34\%\right)$

$40,800

Income tax payable

$40,800

(To record the tax)

2017

Income tax refund receivables

$\left[\left(\$120,000\times 34\%\right)+\left(\$90,000\times 34\%\right)\right]$

$71,400

Deferred tax asset

$\left[\left(\$280,000-\$120,000-\$90,000\right)\times 38\%\right]$

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2018

Income tax expense

$83,600

Income tax payable

$\left(\left(\$220,000-\$70,000\right)\times 38\%\right)$

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

Particulars

Amount

Operating loss before income taxes

($280,000)

Add: Income tax benefit

Carryback

$71,400

Carryforward

$26,600

Net Loss

($182,000)

Date

Particulars

Debit

Credit

2016

Income tax refund receivables

$\left[\left(\$120,000\times 34\%\right)+\left(\$90,000\times 34\%\right)\right]$

$71,400

Deferred tax asset

$\left[\left(\$280,000-\$120,000-\$90,000\right)\times 38\%\right]$

$26,600

Benefit due to loss carryback

$71,400

Benefit due to loss carryforward

$26,600

(To record the loss carryback and carryforward)

2016

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset

$\left(\$26,600\times 25\%\right)$

$6,650

(To record the allowance)

2017

Income tax expense

$83,600

Income tax payable

$\left(\left(\$220,000-\$70,000\right)\times 38\%\right)$

$57,000

Deferred tax asset

$26,600

(To record the deferred tax asset)

2017

Benefit due to loss carryforward

$6,650

Allowance to reduce deferred tax asset $\left(\$26,600\times 25\%\right)$

$6,650

(To record the allowance)

Particulars

Amount

Income before income taxes

4220,000

Add: Income tax expense

Current

$57,000

Deferred

$26,600

Benefit loss

($6,650)

Net Profit

$143,050