Colorado Company has provided you the following information. Year Taxable income
ID: 2718141 • Letter: C
Question
Colorado Company has provided you the following information. Year Taxable income Income tax rate 2014 $390,000 35% 2015 $320,000 37% 2016 $400,000 40% 2017 ($1,200,000) 40% Colorado Company has decided to use the loss carryback and carryforward provision as a result of the year 2017 loss. The enacted tax rate remains at 40% after year 2017. Colorado Company has determined that a valuation allowance is not necessary. Prepare the journal entry on December 31, 2017 to record the carryback and carryforward decision.
Explanation / Answer
The loss for the year 2017 can be carried back to adjust with the taxable income for previous two years. This adjustment of loss with the taxable income will create refund of the income taxes paid in previous year.
Loss shall be first be adjusted with the income of year 2015 and then 2016 and balance unadjusted loss shall be carried forward upto next 20 years.
Loss adjusted with the income of year 2015 = $320,000
Refund of income tax for the year 2015 = $320,000 * 37% =$118,400
Loss adjusted with the income of year 2016 = $400,000
Refund of income tax for the year 2016 = $400,000 * 40% =$160,000
Total refund of income tax = $118,400 + $160,000 = $278,400
Unadjusted loss to be carried forward = $1,200,000 - $320,000 - $400,000 = $480,000
This carried forward of loss will create deferred tax assets at the future tax rate
Deferred tax asset = $480,000 * 40% = $192,000
The journal entries for above transactions shall be as below:
Date
Account title
Debit
Credit
December 31, 2017
Income tax refund receivable
$278,400
Deferred tax asset
$192,000
Benefit due to loss carryback
$278,400
Benefit due to loss carryforward
$192,000
Date
Account title
Debit
Credit
December 31, 2017
Income tax refund receivable
$278,400
Deferred tax asset
$192,000
Benefit due to loss carryback
$278,400
Benefit due to loss carryforward
$192,000