Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2013–2019. Pretax Income (loss) Tax Rate 2013 $ 40,000 30% 2014 25,000 30% 2015 50,000 30% 2016 80,000 40% 2017 (180,000) 45% 2018 70,000 40% 2019 100,000 35% Pretax financial income (loss) and taxable income (loss) were the same for all years since Jennings began business. The tax rates from 2016–2019 were enacted in 2016.

Instructions (a) Prepare the journal entries for the years 2017–2019 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryback and carryforward. Assume that Jennings elects the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year. (b) Indicate the effect the 2017 entry(ies) has on the December 31, 2017, balance sheet. (c) Prepare the portion of the income statement starting with “Operating loss before income taxes,” for 2017. (d) Prepare the portion of the income statement starting with “Income before income taxes” for 2018.

Step by step solution

01

(a) Journal entries

Date	Particulars	Debit	Credit
2017	Income tax refund receivables $\left[\left(\$50,000\times 30\%\right)+\left(\$80,000\times 40\%\right)\right]$	$47,000
	Benefit due to loss carryback		$47,000
	(To record the loss)
2017	Deferred tax asset$\left[\left(\$180,000-\$50,000-\$80,000\right)\times 40\%\right]$	$20,000
	Benefit due to loss carryback		$20,000
	(To record the deferred tax asset)
2018	Income tax expense$\left(\$70,000\times 40\%\right)$	$28,000
	Deferred tax asset		$20,000
	Income tax payable		$8,000
	(To record the income tax expense)
2019	Income tax expense$\left(\$100,000\times 35\%\right)$	$35,000
	Income tax payable		$35,000
	(To record the income tax)

02

(b) Reporting of the amounts as

The amount of $47,000 as income tax refund receivables will be reported under the current assets section. On the other hand, $20,000 as deferred tax asset will be classified under the head of current assets.

03

(c) Income statement for the year 2017

Income Statement
Particulars		Amount
Operating loss before income taxes		($180,000)
Add: Income tax benefit
Carryback	$47,000
Carryforward	$20,000	$67,000
Net Loss		($113,000)

04

(d) Income Statement for the year 2018

Income Statement
Particulars		Amount
Income before income taxes		$70,000
Less: Income tax expense
Current	$8,000
Deferred	$20,000	$28,000
Net income		$42,000

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