Problem 1 Operating Tax Losses (10 marks) NOTE: Each of the tax situations listed below is independent. a) Assume income tax rates of 20% in 2021, 25% in 2020 and 25% in 2019 respectively. In 2019, its 1st year of operations, Gaastra Inc. has a net operating loss of ($120,000). Assume Gaastra management thinks that, at the end of 2019, that it is likely that the loss carryforwards will be realized in the future. Then in 2020, Gaastra has $220,000 in taxable income. Management still believes Gaastra will continue to be profitable in the future. Required: Prepare the required tax entries based on the above information.

b) In 2020, its first year of operations, Chinook Inc. has a net operating loss of ($300,000). Assume the management of Chinook Inc. thinks at the end of 2020, that it is unlikely that the loss carryforward will be realized in the near future. Then, in 2021, Chinook has $255,000 in taxable income, and is expected to be profitable from 2021 onwards. Assume tax rates of 14% and 16% in 2021 and 2020 respectively. The tax rate in 2022 and onwards is expected to be 15%. Required: Prepare the required entries based on the above information.

c) In 2019, its first year of operations, Mad Dogs Inc. has a net operating loss of ($100,000) when the tax rate was 18%. Assume the management of Mad Dogs Inc. thinks at the end of 2019, that it is likely that the loss carryforward will NOT be realized in the near future. Then in 2020, Mad Dogs has another ($55,000) taxable loss and the tax rate is lower at 15%. Assume due to the development of a new manufacturing process in late 2020, that reduces its costs significantly, Mad Dogs management now believes it is now more likely than not that they will have >$300,000 of taxable income in 2021. The tax rate enacted for 2021 and onwards is expected to be only 8%. Required: Prepare the required entries based on the above information.

d) Assume that Sejo Skis Ltd. incurred a ($600,000) loss in fiscal 2020 due to losing a very large lawsuit, which was a one-time extraordinary event. Sejo Skis Ltd. had taxable income of $4,000,000 in fiscal 2016 when the tax rate was 15%. The company broke even in the tax years 2017, 2018 and 2019. Tax rates are expected to increase in the future to 16%. The company is still very short of cash from losing the lawsuit. Required: Prepare the required entries based on the above information.

e) In its first year of operations, 2019, Bose Ltd. reports taxable income of $75,000 and paid 13% in income taxes. It is now the end of 2020, and Bose Ltd. has a loss of ($200,000) for tax purposes due to a global pandemic. Boses management believes at the end of 2020, that it is likely the company will be able to use up its tax losses as sales are now increasing rapidly. The tax rate is currently 13% but rates are expected to increase to 15% starting in 2021. The company is not short of cash but does wish to maximize profit in all its tax years. Required: Prepare the required entries based on the above information.