I need help with this one. Can somebody explain me how to do it. I think that th
ID: 2575120 • Letter: I
Question
I need help with this one. Can somebody explain me how to do it. I think that the carry forward from NOL should be accounted too plus/minus the temporary difference, but I am not sure if I am correct. Answers $96 and $144 are incorrect.
In its first year of operations the Babco co. has a net operating loss(NOL) of $1,600 and a pretax loss of $1,360. The difference is due to a temporary difference that will reverse in the following year when the enacted tax rate is 30%. The tax rate for the current year is 40%.
1. Compute the net tax expense or benefit that Babco would report for the current year. Enter a negative number for expense and a positive number for a benefit.
2. What if Babco's pretax loss was $1,600 and its NOL was $1,360 (i.e. pretax < taxable). Compute the net tax benefit or expense.
Explanation / Answer
Answer -
Temporary difference = Carrying amount - Tax base
Deferred tax asset or liability = Temporary difference x Tax rate
Deferred Tax asset is recognised for unused tax losses to the extent there is probability that there will be profit in future against which these timing differences can be utilised.
Timing Difference = $1600 - $1360 = $240
Deferred Tax Asset = $240 * 30% (tax rate the future year when the asset will be realised)
Deferred Tax asset= $72
Net tax Benefit for the current period = $72
2. In case when preptax loss is higher than NOL, this means higher deduction is allowed in Tax calculation then in books. Hence the pre tax loss is higher than book NOL. This being a timing difference will reverse in future period and will result in tax expense in future period when pre tax income will be higher than book income.
In this case tax expense in current period will be -$72.