Chapter 16: Accounting for Tax Losses
Assignment 16-9
Requirement 1
Taxable income:
Accounting income
Permanent difference:
Golf club dues
Accounting income
subject to tax
Temporary difference:
Depreciation
CCA
Taxable income
Tax rate
Income tax payable
20x3
$ 10,000
20x4
$ 15,000
20x5
($40,000)
20x6
$ 10,000
3,000
4,000
3,000
4,000
13,000
19,000
(37,000)
14,000
6,000
(3,000)
16,000
× 20%
$ 3,200
6,000
(6,000)
19,000
× 20%
$ 3,800
6,000
(12,000)
(43,000)
× 30%
n/a*
6,000
(10,000)
10,000
× 35%
$ 3,500
* Part of loss is carried back at rate of 20%; current year rate is not applicable. See
Requirement 2
Requirement 2
Taxable
Amounts
Tax loss ............................................................................ $(43,000)
Carryback ($16,000 + $19,000) .......................................
35,000
Carryforward .................................................................... $ (8,000)
Benefit
$7,000 (20%)
The $8,000 loss carryforward would be recorded at a rate of 30% ($2,400) if recorded in
20x5. This is the enacted tax rate in 20x5. The 20x6 rate cannot be used until enacted.
This data is used further in Assignment 16-10.
Assignment 16-10
Note: Students should have completed Assignment 16-9 prior to this assignment.
Income tax receivable (1).............................................................
Deferred income tax asset – LCF (2) ...........................................
Deferred income tax – long term (3)......................................
Income tax expense (4) ..........................................................
7,000
2,400
1,500
7,900
(1)
Taxable income, 20x3 & 20x4: (see solution to Assignment 16–9) $16,000 +
$19,000 = $35,000. Amount paid, $3,200 + $3,800 = $7,000
(2)
Taxable loss in 20x5 (see solution to Assignment 16-9) ............................ $43,000
Loss carryback to 20x3 and 20x4 ($16,000 + $19,000) ............................. (35,000)
Tax loss carryforward .................................................................................
8,000
Benefit of tax loss carryforward (@ 30%) .................................................. $ 2,400
(3)
(in 000’s)
Tax
Basis
Accountin
g
Basis
Temporary
Difference
DIT
Liability
$(3)
@ 30%
$(.9)
20x5
Capital assets
(a)
(b)
(c)
(4)
$54 (a)
$57 (b)
Opening
Balance
$.6 (c)
Adjustment
($1.5)
$75,000 – ($3,000 + $6,000 + $12,000)
$75,000 – ($6,000 × 3)
[($75,000 – $9,000) – ($75,000 – $12,000)] × .20
$7,000 + $2,400 – $1,500
In order to record the benefit of the tax loss carryforward in 20x5, the company must be
able to establish that its realization during the carryforward period is more likely than not.
This is defined as a probability of more than 50%.
Assignment 16-20
Schedule of Accounting and Taxable Income
(amounts in thousands)
20x5
Accounting income (loss)
Less: non-taxable dividends
Temporary differences:
Warranty expense
Warranty claims paid
Depreciation expense
CCA
Taxable income
$
20x6
0
0
0
60
(60)
600
(600)
$ 0
20x7
$ (980)
(20)
(1,000)
$
0
(20)
(20)
120
(80)
600
0
$ (360)
160
(200)
600
(500)
$ 40
20x8
20x9
$2,000
0
2,000
$4,000
0
4,000
200
(90)
600
(450)
$2,260
300
(75)
600
(400)
$4,425
Schedule of Temporary Differences
(amounts in thousands)
Tax
basis
20x5–40%
Capital assets
Warranty
20x6–40%
Capital assets
Warranty
20x7–40%
Capital assets
Warranty
20x8–45%
Capital assets
Warranty
20x9–45%
Capital assets
Warranty
$5,600
0
Accounting
basis
$7,600
0
Temporary
difference
Deferred
income tax
Opening
balance
$(2,000)
0
$(800)
0
$(800)
0
$0
0
Adjustment
5,600
0
7,000
(40)
(1,400)
40
(560)
16
(800)
0
240
16
5,100
0
6,400
0
(1,300)
0
(520)
0
(560)
16
40
(16)
4,650
0
5,800
(110)
(1,150)
110
(517.5)
49.5
(520)
0
4,250
0
5,200
(335)
(950)
335
(427.5)
150.75
(517.5)
49.5
2.5
49.5
90
101.25
Journal Entries (amounts in thousands):
20x6 Entry
Deferred income tax—capital assets ....................................... 240,000
Deferred income tax—warranty ............................................. 16,000
Deferred income tax asset—LCF ($360 x .40) ....................... 144,000
Income tax expense (recovery) .........................................
400,000
20x7 Entries
Deferred income tax—capital assets ....................................... 40,000
Deferred income tax—warranty .......................................
16,000
Income tax payable ($40 x .4)...........................................
16,000
Income tax expense (recovery) .........................................
8,000
Income tax payable ................................................................. 16,000
Deferred income tax asset—LCF......................................
16,000
Gross LCF now $360,000 – $40,000 = $320,000; recorded at 40%, or $128,000
20x8 Entries
Income tax expense ................................................................. 965,000
Deferred income tax —capital assets ......................................
2,500
Deferred income tax —warranty ............................................ 49,500
Income tax payable ($2,260 × .45) ...................................
1,017,000
Income tax payable ($320 × .45) ............................................ 144,000
Deferred income tax asset—LCF ($144 – $16) ................
128,000
Income tax expense ($320 × (.45 – .40)) ..........................
16,000
20x9 Entry
Income tax expense ................................................................. 1,800,000
Deferred income tax—warranty ............................................. 101,250
Deferred income tax—capital assets ....................................... 90,000
Income tax payable ($4,425 × .45) ...................................
1,991,250
Assignment 16-27
Carryback
Of the $220,000 tax loss, $120,000 can be carried back to the preceding three years. The
carryback will result in CTC’s realizing a full refund of taxes paid in 20x1, 20x2, and
20x3. The total refund will be $45,600.
Carryforward
The remaining $100,000 of the 20x4 tax loss can be carried forward and applied against
taxable income in the next 20 years. Since management believes that the probability of
realizing the future tax benefits is greater than 50%, the deferred income tax benefit
should be recognized in the year of the loss, 20x4. The 20x5 enacted rate of 36% can be
used. A deferred income tax asset of $36,000 will be recognized.
Temporary differences
20x3 – 40%
Capital assets
Pensions
Temporary Difference
$95,000*
55,000*
deferred
deferred
Ending Balance
$38,000*
22,000*
$60,000
cr.
cr.
cr.
$30,600
30,600
$61,200
cr.
cr.
cr.
20x4 – 36%
Capital assets
Pensions
$85,000** deferred
85,000** deferred
* given
** ($95,000 – $10,000); ($55,000 – $30,000 + $60,000)
Journal entry to record income tax:
Income tax receivable ............................................................
Deferred income tax—LCF ...................................................
Income tax expense ..........................................................
Deferred income tax—long term ($61,200 – $60,000)....
45,600
36,000
80,400
1,200
Lower portion of income statement
Income (loss) from operations before income tax ........................................
Income tax (recovery) ....................................................................................
Net income (loss) ...........................................................................................
($200,000)
80,400
($119,600)