In 2020, its first year of operations, Lulu Inc. reported a $ 500,000 loss for tax purposes. However, in 2021, Lulu reported $ 200,000 taxable income. The tax rate is 25%, and is likely to remain at this rate for the foreseeable future. Lulu reports under IFRS.

Assume that, at the end of 2020, because it is a new company, Lulu’s management thought that it was probable that the loss carryforward would not be realized in the near future.

However, by the end of 2021, management feels it is now probable that there will be future taxable incomes against which the 2020 loss could be applied.

Instructions

a) What entries (if any) would be prepared in 2020 to record the loss carryforward?

b) What entries (if any) would be prepared in 2021 to record current and deferred taxes and to recognize the loss carryforward?