Starlight reported the following pretax financial income (loss) for the years 20

Question

Starlight reported the following pretax financial income (loss) for the years 2015–2019. Pretax Income (Loss) Tax Rate 2015 $640,000 38% 2016 230,000 38% 2017 145,000 38% 2018 (800,000) 35% 2019 180,000 35%

Pretax financial income (loss) and taxable income (loss) were the same for all years involved. Assume the carryback provision is used first for net operating losses.

Instruction : Prepare the journal entries for the years 2017–2019 to record income tax expense, income taxes payable (refundable), and the tax effects of the loss carryback and loss carryforward, assuming that based on the weight of available evidence, it is more likely than not that one-fifth of the benefits of the loss carryforward will not be realized.

Explanation / Answer

Date account titles and explanation debit credit 2017 income tax expense (145000*18%) 55100 Income tax payable 55100 2018 income tax refund receivable 142500 Deferred tax asset 148750 Benefit due to loss carry back ((230000*38%)+(145000*38%)) 142500 Benefit due to loss carry forward (800000-230000-145000)*35% 148750 2018 benefit due to loss carry forward (148750/5) 29750 Allowance to reduce deferred tax asset to expected realizable value 29750 2019 income tax expense 148750 Income tax payable (180000-(800000-230000-145000)) 0 Deferred tax asset 148750 2019 benefit due to loss carry forward 29750 Allowance to reduce deferred tax asset to expected realizable value 29750

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