Playgrounds, Inc., is granted a distribution franchise by Shady Products in Year 1. Operations are profitable until Year 4 when some of the company?s inventories are confiscated and large legal expenses are incurred. Playgrounds? tax rate is 50% each year (all expenses and costs are tax deductible). Relevant income statement data are (in thousands):

Required:

Compute tax expense for each of the Years 1 through 8, and present comparative income statements for these years (assume a 3-year carryback period, a 20-year carryforward period for any losses, and a 100% valuation allowance for the loss carryforward).

Transcribed Image Text:

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 $80 $120 $ 100 $200 $400 $500 $600 Sales Cost of sales. $50 20 30 50 300 50 120 200 250 General and administrative. 10 15 20 100 20 30 40 50 Pretax income. $20 $35 $ 50 $(300) $130 $250 $260 $300