In 2018, its first year of operations, Kimble Corp. has a $740,000 net operating loss when the tax rate is 35%. In 2019, Kimble has $290,000 taxable income and the tax rate remains 35%. Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known). What are the entries in 2018 to record the tax effects of the loss carryforward?

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Ayaan Simmons

Business

6 July, 17:35

In 2018, its first year of operations, Kimble Corp. has a $740,000 net operating loss when the tax rate is 35%. In 2019, Kimble has $290,000 taxable income and the tax rate remains 35%. Assume the management of Kimble Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2019 operations are known). What are the entries in 2018 to record the tax effects of the loss carryforward?

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Antony Solis · Answer 1

The journal entries are shown below:

a) Deferred tax asset A/c Dr $259,000 ($740,000 * 35%)

To benefit due to loss carry forward $259,000

(Being recording of the carry forward amount is done)

Benefit due to loss carry forward A/c Dr $259,000

To allowance to reduce deferred tax to expected realizable value $259,000

(Being allowance amount is recorded)

b) Income tax expense A/c Dr. $101,500 ($290000 * 35%)

To Deferred Tax Asset A/c $101,500

(Being recording of current tax and deferred tax is done)

Allowance to reduce deferred tax to expected realizable value Dr $101,500

To benefit due to loss carry forward $101,500

(Being allowance eliminated and carry forward loss is recorded)