Jennings Inc

    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.

                                                                                                                                      Order Now