Hello,

I have a question related to accounting exercises on the topic carrying back an operating loss. For these particular exercises, I am using the intermediate accounting textbook, Spiceland 7th edition. I've attached the problems plus the solutions. Regarding these problems, I am confused about the seemingly different accounting treatment. In the first problem(BE 16-13), the operating loss is 25 million and the combined taxable income of the two years the operating loss is covering in the carry back is 35 million. The journal entry for this problem is a debit to a Income tax refund receivable for 10 million and a credit to income tax benefit-operating loss for 10 million. The explanation for this journal entry is that since the operating loss of 25 million is less than the combined taxable income of the two years of 35 million, that the company in this problem(Air parts) cannot get back all the taxes paid. Thus, the refund is the difference between 35 million and 25 million. Now my confusion lies in the apparent inconsistency between this problem and the other problem I've introduced in the attached PDF.

In the other problem, the operating loss is 100,000 and the combined taxable income is 140,000, meaning taxable income is higher than operating loss by 40,000. By the logic of the prior problem, the refund should simply be 40,000, but it's 41,000 for this problem(80,000*.40=32,000;20,000*.45=9000; 32,000+9000=41,000). I am assuming the difference between this problem and the prior problem is that in this problem, the tax rates are different in the years the losses were being carried back to(40% in 2011and 45% in 2012). So if the tax rates were both 40%(the same as the enacted tax rate as well), then the refund would be 40,000. However, let's say the tax rates for those 2 years were 25%, then the refund would equal 25,000?

80,000*0.25=20,000; 20,000*0.25=5,000;20,000+5,000=25,000

Why is that? Can anybody provide any further insight on this concept and these problems?

Confirming Pages 984 SECTION 3 BE 16-5 Temporary difference; income tax payable given Financial Instruments and Liabilities Refer to the situation described in BE 16-4. Suppose the unearned portion of the rent collected was $40 million at the end of 2014. Taxable income is $200 million. Prepare the appropriate journal entry to record income taxes. LO16-2 BE 16-6 Valuation allowance LO16-2, LO16-3 BE 16-7 Valuation allowance LO16-2, LO16-3 At the end of the year, the deferred tax asset account had a balance of $12 million attributable to a cumulative temporary difference of $30 million in a liability for estimated expenses. Taxable income is $35 million. No temporary differences existed at the beginning of the year, and the tax rate is 40%. Prepare the journal entry(s) to record income taxes assuming it is more likely than not that one-fourth of the deferred tax asset will not ultimately be realized. Hypercom Corporation is a provider of electronic card payment terminals, peripherals, network products, and software. In its 2010 annual report, it reported current and long-term deferred tax assets totaling about $43 million. The company also reported valuation allowances totaling about $43 million. What would motivate Hypercom to have a valuation allowance almost equal to its deferred tax assets? Real World Financials BE 16-8 Temporary and permanent differences; determine deferred tax consequences LO16-1, LO16-4 Differences between financial statement and taxable income were as follows: Pretax accounting income Permanent difference ($ in millions) $300 (24) 276 Temporary difference Taxable income (18) $258 The cumulative temporary difference to date is $40 million (also the future taxable amount). The enacted tax rate is 40%. What is deferred tax asset or liability to be reported in the balance sheet? BE 16-9 Calculate taxable income LO16-1, LO16-4 BE 16-10 Multiple tax rates LO16-5 BE 16-11 Change in tax rate LO16-5 BE 16-12 Operating loss carryforward Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $800,000 and with an expected useful life of four years and no residual value. For tax purposes, the deduction is 40%, 30%, 20%, and 10% in those years. Pretax accounting income the first year the equipment was used was $900,000, which includes interest revenue of $20,000 from municipal bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 40%. Prepare the journal entry to record income taxes. J-Matt, Inc., had pretax accounting income of $291,000 and taxable income of $300,000 in 2013. The only difference between accounting and taxable income is estimated product warranty costs for sales this year. Warranty payments are expected to be in equal amounts over the next three years. Recent tax legislation will change the tax rate from the current 40% to 30% in 2015. Determine the amounts necessary to record J-Matt's income taxes for 2013 and prepare the appropriate journal entry. Superior Developers sells lots for residential development. When lots are sold, Superior recognizes income for financial reporting purposes in the year of the sale. For some lots, Superior recognizes income for tax purposes when collected. In the prior year, income recognized for financial reporting purposes for lots sold this way was $20 million, which would be collected equally over the next two years. The enacted tax rate was 40%. This year, a new tax law was enacted, revising the tax rate from 40% to 35% beginning next year. Calculate the amount by which Superior should reduce its deferred tax liability this year. During its first year of operations, Nile.com reported an operating loss of $15 million for financial reporting and tax purposes. The enacted tax rate is 40%. Prepare the journal entry to recognize the income tax benefit of the operating loss. LO16-7 BE 16-13 Operating loss carryback LO16-7 BE 16-14 Tax uncertainty LO16-9 spi2532X_ch16_946-1007.indd 984 AirParts Corporation reported an operating loss of $25 million for financial reporting and tax purposes. Taxable income last year and the previous year, respectively, was $20 million and $15 million. The enacted tax rate each year is 40%. Prepare the journal entry to recognize the income tax benefit of the operating loss. AirParts elects the carryback option. First Bank has some question as to the tax-free nature of $5 million of its municipal bond portfolio. This amount is excluded from First Bank's taxable income of $55 million. Management has determined that there is a 65% chance that the tax-free status of this interest can't withstand scrutiny of taxing authorities. Assuming a 40% tax rate, what amount of income tax expense should the bank report? 13/01/12 3:55 PM Brief Exercise 16-12 Because the loss year is Nile.com's first year of operations, the carryback option is unavailable. The loss is carried forward. Journal entry Deferred tax asset ($15 million x 40%) Income tax benefit - operating loss 6,000,000 6,000,000 Brief Exercise 16-13 Because the operating loss is less than the previous two years taxable income, AirParts cannot get back all taxes paid those two years. It can reduce taxable income from two years ago by $15 million (to zero) and last year's taxable income by $10 million and get a refund of $10 million of the taxes paid those years. Journal entry Receivable - income tax refund ($25 million x 40%) Income tax benefit - operating loss Solutions Manual, Vol.2, Chapter 16 10,000,000 10,000,000 The McGraw-Hill Companies, Inc., 2013 16-7 Confirming Pages CHAPTER 16 Accounting for Income Taxes 989 Required: Determine the effect of the change and prepare the appropriate journal entry to record Bronson's income tax expense in 2013. What adjustment, if any, is needed to revise retained earnings as a result of the change? E 16-18 Multiple temporary differences; record income taxes The information that follows pertains to Esther Food Products: a. At December 31, 2013, temporary differences were associated with the following future taxable (deductible) amounts: Depreciation Prepaid expenses Warranty expenses LO16-6 $60,000 17,000 (12,000) b. No temporary differences existed at the beginning of 2013. c. Pretax accounting income was $80,000 and taxable income was $15,000 for the year ended December 31, 2013. d. The tax rate is 40%. Required: Determine the amounts necessary to record income taxes for 2013 and prepare the appropriate journal entry. E 16-19 Multiple temporary differences; record income taxes The information that follows pertains to Richards Refrigeration, Inc.: a. At December 31, 2013, temporary differences existed between the financial statement carrying amounts and the tax bases of the following: ($ in millions) LO16-6 Carrying Amount Buildings and equipment (net of accumulated depreciation) Prepaid insurance Liabilityloss contingency Tax Basis $120 50 25 Future Taxable (Deductible) Amount $90 0 0 $30 50 (25) b. No temporary differences existed at the beginning of 2013. c. Pretax accounting income was $200 million and taxable income was $145 million for the year ended December 31, 2013. The tax rate is 40%. Required: 1. Determine the amounts necessary to record income taxes for 2013 and prepare the appropriate journal entry. 2. What is the 2013 net income? E 16-20 Operating loss carryforward During 2013, its first year of operations, Baginski Steel Corporation reported an operating loss of $375,000 for financial reporting and tax purposes. The enacted tax rate is 40%. LO16-7 Required: E 16-21 Operating loss carryback Wynn Sheet Metal reported an operating loss of $100,000 for financial reporting and tax purposes in 2013. The enacted tax rate is 40%. Taxable income, tax rates, and income taxes paid in Wynn's first four years of operation were as follows: 1. Prepare the journal entry to recognize the income tax benefit of the operating loss. Assume the weight of available evidence suggests future taxable income sufficient to benefit from future deductible amounts from the operating loss carryforward. 2. Show the lower portion of the 2013 income statement that reports the income tax benefit of the operating loss. LO16-7 Taxable Income 2009 2010 2011 2012 $60,000 70,000 80,000 60,000 Tax Rates Income Taxes Paid 30% 30 40 45 $18,000 21,000 32,000 27,000 Required: 1. Prepare the journal entry to recognize the income tax benefit of the operating loss. Wynn elects the carryback option. 2. Show the lower portion of the 2013 income statement that reports the income tax benefit of the operating loss. spi2532X_ch16_946-1007.indd 989 13/01/12 3:55 PM Exercise 16-21 Requirement 1 ($ in thousands) Current Year 2013 Prior Years 2011 2012 Operating loss Loss carryback (80) (20) Enacted tax rate Tax payable (refundable) 40% 45% (32) (9) Journal entry at the end of 2013 ReceivableIncome tax refund ($32 + 9) Income tax benefitOperating loss (100) 100 0 40% 0 41 41 Requirement 2 ($ in thousands) Operating loss before income taxes Less: Income tax benefit from loss carryback Net operating loss Solutions Manual, Vol.2, Chapter 16 $100 (41) $ 59 The McGraw-Hill Companies, Inc., 2013 16-31