Ex. 19-98—Operating loss carryforward.
In 2007, its first year of operations, Penner Corp. has a $900,000 net operating loss when the tax rate is 30%. In 2008, Penner has $360,000 taxable income and the tax rate remains 30%.
Assume the management of Penner 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 2008 operations are known).
(a)What are the entries in 2007 to record the tax loss carryforward?
(b)What entries would be made in 2008 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2008 it is more likely than not that the deferred tax asset will be realized.)
Pr. 19-99—Differences between accounting and taxable income and the effect on deferred taxes.
The following differences enter into the reconciliation of financial income and taxable income of Hatley Company for the year ended December 31, 2007, its first year of operations. The enacted income tax rate is 30% for all years.
Pretax accounting income $700,000
Excess tax depreciation (320,000)
Litigation accrual 70,000
Unearned rent revenue deferred on the books but appropriately
recognized in taxable income 50,000
Interest income from New York municipal bonds (20,000)
Taxable income $480,000
1.Excess tax depreciation will reverse equally over a four-year period, 2008-2011.
2.It is estimated that the litigation liability will be paid in 2011.
3.Rent revenue will be recognized during the last year of the lease, 2011.
4.Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2011.
(a)Prepare a schedule of future taxable and (deductible) amounts.
(b)Prepare a schedule of the deferred tax (asset) and liability.
(c)Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).
(d)Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2007.