In 2018, its first year of operations, Kimble Corp. has a $740,000 net operating loss when the tax rate is 35%. In 2019, Kimble has $290,000 taxable income and the tax rate remains 35%. Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known). What are the entries in 2018 to record the tax effects of the loss carryforward?

Question

Business

Jeramiah Dixon

31 January, 10:28

In 2018, its first year of operations, Kimble Corp. has a $740,000 net operating loss when the tax rate is 35%. In 2019, Kimble has $290,000 taxable income and the tax rate remains 35%. Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known). What are the entries in 2018 to record the tax effects of the loss carryforward?

+1

Answers (1)

Know the Answer?

Ellen · Answer 1

The journal entries are shown below:

a) Deferred tax asset A/c Dr $259,000 ($740,000 * 35%)

To benefit due to loss carry forward $259,000

(Being recording of the carry forward amount is done)

Benefit due to loss carry forward A/c Dr $259,000

To allowance to reduce deferred tax to expected realizable value $259,000

(Being allowance amount is recorded)

b) Income tax expense A/c Dr. $101,500 ($290000 * 35%)

To Deferred Tax Asset A/c $101,500

(Being recording of current tax and deferred tax is done)

Allowance to reduce deferred tax to expected realizable value Dr $101,500

To benefit due to loss carry forward $101,500

(Being allowance eliminated and carry forward loss is recorded)