Mobe Co reported following operating income (loss) for first three year opern

Yr1- $300,000

Yr-2 (700,000)

Yr 3-1,200,000

For each yr there was no defferd Incometax before yr1,mobe effective Income tax rate is 30%.In its yr2 Income tax rerturn Mobe elected Two year Carryback of Loss.

In its yr3 Income stat What amount should Mobe report as Total Income tax expense?

a.$120,000

b.150,000

c.240,000

d.360,000

Correct anwswer is d.

Explanation :The question asks for income tax expense in the income statement of year 3. Remember, this is based on year 3 GAAP income, not on the actual tax return.

In year 2, the 400,000 NOL carry forward creates a 120,000 deferred tax asset on the balance sheet.

In year 3, GAAP income is 1,200,000. This results in total income tax expense of 360,000. Due to the NOL carryover, we only pay 240,000 on the tax return and the other 120,000 is a reversal of the deferred tax asset created in year 2.

My Query

I did not understand the carryback loss concept? Can anyone please simplify this for me

Income/ (Loss)           Tax Expense                   Carryback/forward

YR. 1     300,000                             90,000                                300,000

YR. 2     (700,000)                        -           

YR. 3     1,200,000                         360,000                            400,000

The NOL for YR. 2 is 700,000, this means they can go back and apply the 700,000 loss against income earned for the past two years. They earned and paid tax on 300,000 in YR. 1, so they can apply 300,000 of the 700,000 loss to YR. 1. The remainder will be carried forward to reduce income (not tax expense) by the remainder. However, if they earned less than 400,000 they could only reduce to zero and save the rest for future years.