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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Operating Loss At the end of 2019, its first year of operations, Swelland Company reported a pretax operating loss of $32,000 for both financial reporting and income tax purposes. At that time, Swelland had no positive verifiable evidence that it would earn future taxable income. However, due to successful management, the company reported pretax operating income (and taxable income) of $70,000 in 2020. During both years, the income tax rate was 30%, and no change had been enacted for future years.

Required:

  1. 1. Prepare Swelland’s income tax journal entries at the end of 2019.
  2. 2. Prepare Swelland’s income tax journal entry at the end of 2020.
  3. 3. Prepare the lower portion of Swelland’s 2020 income statement.

1.

To determine

Prepare journal to record the entry for income tax of Company S at the end of 2019.

Explanation

Net Operating loss carryback: Carry back of net operating losses (NOLs) can help provide cash infusion for business taxpayers by offsetting net income in previous years, resulting in a tax refund.

Valuation Allowance: Valuation allowance is that financial item that offsets the deferred tax assets either fully or partly as deferred tax assets are more likely not realizable.

Prepare journal to record the entry for income tax of Company S at the end of 2019:

DateAccounts title and explanationPost Ref.

Debit

($)

Credit

($)

2019    
December 31Deferred Tax Asset 9,600 
     Income Tax Benefit From Operating Loss     Carry Back ($32,000×30%)  9,600
 (To record the creat

2.

To determine

Prepare journal to record the entry for income tax of Company S at the end of 2020.

3.

To determine

Prepare the lower portion of Company S’s income statement.

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