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Subject Topic: CPA-00789 F-6 mcq (Topic Closed Topic Closed) Post ReplyPost New Topic
  
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nishvik
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Posted: 24 Jun 2012 at 14:16 | IP Logged  

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



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astone
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Posted: 24 Jun 2012 at 19:45 | IP Logged  

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.

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nishvik
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Posted: 25 Jun 2012 at 12:14 | IP Logged  

Hey Astone..

Thank you soo much for the explanation...

So What I understand is the problem says two year
carryback loss so in yr 2 loss of (700,000) is carried
back.

sO in year 1.. 300,000 profit is offset by (700,000) loss
creating (400,000) loss and 30 percent on that is
deferred tax asset ie 120,000

Now..I thought they got $360,000 answer by multiplying
1,200,000*30 % which is wrong concept.

so for current Income tax expense they deduct (400,000)
so 800,000 * 30 =240,000

but we deduct the defferd tax asset why are we adding
$240,000+ $120,000??

This problem is in my head and somehow I cant understand
the logic??

Studying FAR has surely made me to complex things :-(

Please help..

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fugui88
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Posted: 25 Jun 2012 at 15:14 | IP Logged  

The JE for year 3 is

Dr. Income Tax Expense 360 (1200x30%)-> answer

Cr. Income Tax Payable   240 (plug-in)
Cr. Deferred Tax Assets 120 (400x30%)

The question is asking what's the Income Tax Expense, the
JE answers the question well. Thanks
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wool1
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Posted: 25 Jun 2012 at 19:48 | IP Logged  

Year 1
Income tax expense  90,000
..........................Income tax payable  90,000
year 2
Income tax payable (refund)  90,000
Deferred tax asset              120,000
..........................income tax expense (benefit) 210,000
year 3
income tax expense 360,000
..........................Income tax payable 240,000
..........................Deferred tax asset   120,000
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