Problem Four

Alto Company incurs a net operating loss in 2019 of $4,000,000. The loss is the same for pretax accounting income and for tax purposes (no temporary or permanent differences). Under income tax law, losses may only be carried forward to later years (carrybacks are not permitted). Alto incurs pretax accounting and taxable income of $6,000,000 in 2020 and all of the loss carryforward is used to offset some of the 2020 income on the tax return that year. Altos income tax rate is 20% for all years.

Required:

1. Prepare the accounting entries for 2019 to account for the loss carryforward.

2. Prepare the accounting entries for 2020 to account for taxes that year.

3. Explain when a valuation allowance may have been proper to record in 2019.