E19-23 (L03) (NOL Carryback and Carryforward, Valuation Account versus No Valuation Account)

Spamela Hamderson Inc. reports the following pretax income (loss) for both financial reporting purposes and tax purposes. (Assume the carryback provision is used for a net operating loss.)

Income (Loss) Tax Rate2009 $ 29,000 30%2010 40,000 302011 17,000 352012 48,000 502013 (150,000) 402014 90,000 402015 30,000 402016 105,000 402017 (60,000) 45 Year Pretax Income (Loss) Tax Rate2015 $120,000 34%2016 90,000 342017 (280,000) 382018 220,000 38

The tax rates listed were all enacted by the beginning of 2015.

Instructions

(a) Prepare the journal entries for the years 20152018 to record income tax expense (benefit) and income taxes payable (refundable) and the tax effects of the loss carryback and carryforward, assuming that at the end of 2017 the benefits of the loss carryforward are judged more likely than not to be realized in the future.

(b) Using the assumption in (a), prepare the income tax section of the 2017 income statement beginning with the line Operating loss before income taxes.

(c) Prepare the journal entries for 2017 and 2018, assuming that based on the weight of available evidence, it is more likely than not that one-fourth of the benefits of the loss carryforward will not be realized.

(d) Using the assumption in (c), prepare the income tax section of the 2017 income statement beginning with the line Operating loss before income taxes.