Question

E19.25 (LO 3) (NOL Carryforward, Valuation Account Needed) Meyer reported the following pretax financial income (loss) for the years 2020-2022. 2020 $120,000 2021 (150,000) 2022 180,000 Pretax financial income (loss) and taxable income (loss) were the same for all years involved. The enacted tax rate was 20% for 2020-2022. Instructions a. Prepare the journal entries for the years 2020-2022 to record income tax expense, income taxes payable, and the tax effects of the 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. b. Prepare the income tax section of the 2021 income statement beginning with the line "Income (loss) before income taxes."

Answer 1

Part A

Date	Account titles and explanation	Debit	Credit
2020	Income Tax Expense	24000
	Income Tax Payable (120000*20%)		24000
2021	Income Tax Refund Receivable	24000
	Deferred Tax Asset (20%*(150000-120000))	6000
	Benefit Due to Loss Carryback		24000
	Benefit Due to Loss Carryforward		6000
	Benefit Due to Loss Carryforward	1200
	Allowance to Reduce Deferred Tax Asset to Expected Realizable Value (6000*1/5)		120
2022	Income tax expense	36000
	Deferred tax assets		6000
	Income tax payable (180000-30000)*20%		30000
	Allowance to Reduce Deferred Tax Asset to Expected Realizable Value	1200
	Benefit Due to Loss Carryforward		1200

Part B

Income (loss) before income taxes		(150000)
Income tax benefit
Benefit due to loss carryback	24000
Benefit due to loss carryforward	1200	25200
Net loss		$(124800)