Question

SUPPLEMENTAL PROBLEM 19-3 In its first two years of operations, GraNOLA Corporation reports a net operating loss (NOL) of $500,000 for 2021 and taxable income of $70,000 before any NOL carryforward for 2022. Granola has a 25% tax rate. As of the end of each year, cumulative temporary differences are: • Cumulative temporary difference at December 31 2021 and 2022, giving rise to future taxable amounts of $230,000 and $240,000, respectively. • Cumulative temporary difference at December 31, 2021 and 2022, giving rise to future deductible amounts of $95,000 and $120,000, respectively. Assume that, based on the weight of available evidence, it is more likely than not that $100,000 and $64,000 at the end of 2021 and 2022, respectively, of future deductible amounts and loss carryforwards will not be realized. Required: Prepare GraNOLa Corporation's journal entries for the current and deferred portions of income taxes for 2021 and 2022.

Answer 1

	2021 ($)	2022 ($)
Net operating loss / Taxable income	-500000	70000
Current tax (25%)	0	17500
Cumulative temporary differences - Future taxable amounts	230000	240000
Cumulative temporary differences - Future deductible amounts (95000-95000; 120000-64000)	0	56000
Net future taxable amount	230000	184000
Deferred taxes (25%)	57500	46000

Date	Particulars	Debit ($)	Credit ($)
2021	Income tax expense	0
	Income tax payable		0
	To record the tax liability for the year
	Deferred tax expense	17500
	Deferred tax liability		17500
	To record deferred taxes for the year
2022	Income tax expense	57500
	Income tax payable		57500
	To record the tax liability for the year
	Deferred tax expense	46000
	Deferred tax liability		46000
	To record deferred taxes for the year