In 2013, its first year of operations, Landon Corp. has a $700 ,000 net operatin
ID: 2491717 • Letter: I
Question
In 2013, its first year of operations, Landon Corp. has a $700 ,000 net operating loss when the tax rate is 30%. In 2014, Landon has $300,000 taxable income and the tax rate remains 30%. (a) Assume the management of Landon Corp. thinks that it is more likely than not that the loss carry forward will be realized in the near future because of a major contract that is expected to be signed in early 2015 . Prepare the journal entry(s) to record income taxes for 2013 and 2014. (b) Assume that at the end of 2014, the management of Landon Corp. thinks that it is more likely than not that the loss carry forward will not be realized in the near future. What additional journal entry should be made at the end of 2014?
Explanation / Answer
Recognition of Benefit of Loss Carryforward When Realized
Income Tax Refund Receivable 210,000
Benefit Due to Loss Carryback 210,000
Deferred Tax Asset 110,000
Benefit Due to Loss Carryforward 110,000
A company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or all of the deferred tax asset.
“More likely than not” means a level of likelihood of at least slightly more than 50 percent.
The federal tax laws permit taxpayers to use the losses of one year to offset the profits of other years (carryback and carryforward).
Additional entry would be
Benefits due to loss carry forward 110,000
to allowance for deffered tax asset 110,000
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