P19-5 (NOL without Valuation Account) Jennings Inc. reported the following pretax income (loss) and related tax rates during the years 2006–2012..
Year Pretax Income (Loss) Tax Rate
2006 $40,000 30%
2007 25,000 30%
2008 50,000 30%
2009 80,000 40%
2010 (180,000) 45%
2011 70,000 40%
2012 100,000 35%
Pretax financial income (loss) and taxable income (loss) were the same for all years sinceJenningsbegan business. The tax rates from 2009–2012 were enacted in 2009.
Instructions:
(a) Prepare the journal entries for the years 2010–2012 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.
2010 Income Tax Refund Receivable 2008 ($50,000 × 30%) 15,000
Income Tax Refund Receivable 2009 ($80,000 × 40%) 32,000
Benefit Due to Loss Carryback 47,000
Deferred Tax Asset [($180,000-$50,000-$80,000) × 40%] 20,000
Benefit Due to Loss Carryforward 20,000
2011 Income Tax Expense 28,000
Deferred Tax Asset 20,000
Income Tax Payable [($70,000 – $50,000) × 40%] 8,000
2012 Income Tax Expense 35,000
Income Tax Payable ($100,000 × 35%) 35,000
(b) Indicate the effect the 2010 entry(ies) has on the December 31, 2010, balance sheet.
The income tax refund receivable account totaling $47,000 will be reported under current assets on the balance sheet at December 31, 2010. This type of receivable is usually listed immediately above inventory in the current assets section. This receivable is normally collectible within two months of filing the amended tax returns reflecting the carry back. A deferred tax asset of $20,000 should also be classified as a current asset because the benefits of the loss carry forward are expected to be realized in the year that immediately follows the loss year which means the benefits are expected to be realized in 2011. A current deferred tax asset is usually listed at or near the end of the list of current assets on the balance sheet. Also, retained earnings are increased by $67,000 (15,000 + 32,000 +20,000) as a result of the entries to record the benefits of the loss carry back and the loss carry forward.
(c) Prepare the portion of the income statement, starting with “Operating loss before income taxes,”
for 2010.
2010 Income Statement
Operating loss before income taxes ($180,000)
Income tax benefit
Benefit due to loss carryback $47,000
Benefit due to loss carryforward 20,000 67,000
Net loss ($113,000)
(d) Prepare the portion of the income statement, starting with “Income before income taxes,” for 2011.