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Topic: CPA-00789 F-6 mcq ( Topic Closed)
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nishvik Contributor
Joined: 01 Aug 2010 Location: United States
Online Status: Offline Posts: 56
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Posted: 24 Jun 2012 at 14:16 | IP Logged
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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
__________________ Thank you
Nishvik
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astone Contributor
Joined: 23 Mar 2011 Location: United States
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Posted: 24 Jun 2012 at 19:45 | IP Logged
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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 Contributor
Joined: 01 Aug 2010 Location: United States
Online Status: Offline Posts: 56
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Posted: 25 Jun 2012 at 12:14 | IP Logged
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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..
__________________ Thank you
Nishvik
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fugui88 Newbie
Joined: 22 Jun 2012 Location: United States
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Posted: 25 Jun 2012 at 15:14 | IP Logged
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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 Newbie
Joined: 26 May 2011
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Posted: 25 Jun 2012 at 19:48 | IP Logged
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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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