Brief Exercise 19-14 Culver Inc. incurred a net operating loss of $450,000 in 20

Question

Brief Exercise 19-14 Culver Inc. incurred a net operating loss of $450,000 in 2017. Combined income for 2015 and 2016 was $329,000. The tax rate for all years is 30%. Culver elects the carryback option. Assume that it is more likely than not that the entire net operating loss carryforward will not be realized in future years. Prepare all the journal entries necessary at the end of 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit (To record carryback.) (To record carryforward.) (To record allowance.)

Explanation / Answer

Assuming the combined income given for 2015 and 2016 is post tax income, firstly we would calculate taxable income or income before paying off taxes for 2016 and 2016

Taxable income for 2016 and 2016 = 329000/(1-.30) which will come as $470,000.

Loss for 2017 is $450000 which can be fully setoff with the previous income of 2 years that is $4,50,000 can be fully set off with $4,70,000

So Tax Refund permissible to company will be $4,50,000*.30= $1,35,000.

Journal Entry would be

Income Tax Refundable A/c Dr. $135000

To Income Tax Expense A/c Cr. $135000

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