Redbud began operations at the beginning of Year 1, and has one depreciable asset with an original cost of $200, acquired at the start of Year 1. Redbud uses straight-line depreciation over 5 years for financial reporting and MACRS (3-year asset). Information about carrying value and tax basis of the asset is found in the table below. Book Tax Year Depreciation Carrying value MACRS Tax basis 1 40 160 66 134 2 40 120 90 44 3 40 80 30 14 4 40 40 14 5 40 In Years 1 and 2, Redbud had a small amount of positive net income and positive taxable income. In Year 3, Redbud experienced a $2,000 loss for net income. Redbud is not in an industry that is eligible for the carryback option, so Redbud will carry the loss forward. Redbud’s tax rate is 20%. Requirements: Calculate the net operating loss for Year 3. Prepare the journal entry to record income taxes for Year 3. Assume that Redbud only expects to realize 60% of the tax carryforward in future years. Prepare the necessary journal entry to adjust for this expectation. In Year 4, Redbud earned net income of $200. Prepare the journal entry to record income taxes.
Redbud began operations at the beginning of Year 1, and has one depreciable asset with an original cost of $200, acquired at the start of Year 1. Redbud uses straight-line depreciation over 5 years for financial reporting and MACRS (3-year asset). Information about carrying value and tax basis of the asset is found in the table below. Book Tax Year Depreciation Carrying value MACRS Tax basis 1 40 160 66 134 2 40 120 90 44 3 40 80 30 14 4 40 40 14 5 40 In Years 1 and 2, Redbud had a small amount of positive net income and positive taxable income. In Year 3, Redbud experienced a $2,000 loss for net income. Redbud is not in an industry that is eligible for the carryback option, so Redbud will carry the loss forward. Redbud’s tax rate is 20%. Requirements: Calculate the net operating loss for Year 3. Prepare the journal entry to record income taxes for Year 3. Assume that Redbud only expects to realize 60% of the tax carryforward in future years. Prepare the necessary journal entry to adjust for this expectation. In Year 4, Redbud earned net income of $200. Prepare the journal entry to record income taxes.
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter18: Accounting For Income Taxes
Section: Chapter Questions
Problem 5RE: Turnip Company purchased an asset at a cost of 10,000 with a 10-year life during the current year....
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Redbud began operations at the beginning of Year 1, and has one depreciable asset with an original cost of $200, acquired at the start of Year 1. Redbud uses straight-line
| Book |
Tax |
| Year | Depreciation | Carrying value | MACRS |
Tax basis |
|
1 |
40 | 160 | 66 | 134 |
| 2 | 40 | 120 | 90 | 44 |
| 3 | 40 | 80 | 30 | 14 |
| 4 | 40 | 40 | 14 | |
| 5 | 40 |
In Years 1 and 2, Redbud had a small amount of positive net income and positive taxable income. In Year 3, Redbud experienced a $2,000 loss for net income. Redbud is not in an industry that is eligible for the carryback option, so Redbud will carry the loss forward. Redbud’s tax rate is 20%.
Requirements:
- Calculate the net operating loss for Year 3.
- Prepare the
journal entry to record income taxes for Year 3. - Assume that Redbud only expects to realize 60% of the tax carryforward in future years. Prepare the necessary journal entry to adjust for this expectation.
- In Year 4, Redbud earned net income of $200. Prepare the journal entry to record income taxes.
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