Chapter 16: Accounting for Tax Losses

Chapter 16: Accounting for Tax Losses

Assignment 16-9

Requirement 1

Taxable income: / 20x3 / 20x4 / 20x5 / 20x6
Accounting income / $ 10,000 / $ 15,000 / ($40,000) / $ 10,000
Permanent difference:
Golf club dues / 3,000 / 4,000 / 3,000 / 4,000
Accounting income subject to tax / 13,000 / 19,000 / (37,000) / 14,000
Temporary difference:
Depreciation
CCA / 6,000
(3,000) / 6,000
(6,000) / 6,000(12,000) / 6,000
(10,000)
Taxable income / 16,000 / 19,000 / (43,000) / 10,000
Tax rate / × 20% / × 20% / × 30% / × 35%
Income tax payable / $ 3,200 / $ 3,800 / n/a* / $ 3,500

*Part of loss is carried back at rate of 20%; current year rate is not applicable. See Requirement 2

Requirement 2

Taxable

AmountsBenefit

Tax loss...... $(43,000)

Carryback ($16,000 + $19,000)...... 35,000 $7,000 (20%)

Carryforward...... $ (8,000)

The $8,000 loss carryforward would be recorded at a rate of 30% ($2,400) if recorded in 20x5. This is the enacted tax rate in 20x5. The 20x6 rate cannot be used until enacted.

This data is used further in Assignment 16-10.

Assignment 16-10

Note: Students should have completed Assignment 16-9 prior to this assignment.

Income tax receivable (1)...... 7,000

Deferred income tax asset – LCF (2)...... 2,400

Deferred income tax – long term (3)...... 1,500

Income tax expense (4)...... 7,900

(1)Taxable income, 20x3 & 20x4: (see solution to Assignment 16–9) $16,000 + $19,000 = $35,000. Amount paid, $3,200 + $3,800 = $7,000

(2)Taxable loss in 20x5 (see solution to Assignment 16-9)...... $43,000

Loss carryback to 20x3 and 20x4 ($16,000 + $19,000)...... (35,000)

Tax loss carryforward...... 8,000

Benefit of tax loss carryforward (@ 30%)...... $ 2,400

(3)

(in 000’s) / Tax
Basis /

Accounting

Basis / Temporary
Difference / DIT
Liability / Opening
Balance / Adjustment
20x5 / @ 30%
Capital assets / $54 (a) / $57 (b) / $(3) / $(.9) / $.6 (c) / ($1.5)

(a)$75,000 – ($3,000 + $6,000 + $12,000)

(b)$75,000 – ($6,000 × 3)

(c)[($75,000 – $9,000) – ($75,000 – $12,000)] × .20

(4)$7,000 + $2,400 – $1,500

In order to record the benefit of the tax loss carryforward in 20x5, the company must be able to establish that its realization during the carryforward period is more likely than not. This is defined as a probability of more than 50%.

Assignment 16-20

Schedule of Accounting and Taxable Income

(amounts in thousands)

20x5 / 20x6 / 20x7 / 20x8 / 20x9
Accounting income (loss) / $ 0 / $ (980) / $ 0 / $2,000 / $4,000
Less: non-taxable dividends / 0 / (20) / (20) / 0 / 0
0 / (1,000) / (20) / 2,000 / 4,000
Temporary differences:
Warranty expense / 60 / 120 / 160 / 200 / 300
Warranty claims paid / (60) / (80) / (200) / (90) / (75)
Depreciation expense / 600 / 600 / 600 / 600 / 600
CCA / (600) / 0 / (500) / (450) / (400)
Taxable income / $ 0 / $ (360) / $ 40 / $2,260 / $4,425

Schedule of Temporary Differences

(amounts in thousands)

Tax
basis / Accounting
basis / Temporary
difference / Deferred
income tax / Opening balance / Adjustment
20x5–40%
Capital assets / $5,600 / $7,600 / $(2,000) / $(800) / $(800) / $0
Warranty / 0 / 0 / 0 / 0 / 0 / 0
20x6–40%
Capital assets / 5,600 / 7,000 / (1,400) / (560) / (800) / 240
Warranty / 0 / (40) / 40 / 16 / 0 / 16
20x7–40%
Capital assets / 5,100 / 6,400 / (1,300) / (520) / (560) / 40
Warranty / 0 / 0 / 0 / 0 / 16 / (16)
20x8–45%
Capital assets / 4,650 / 5,800 / (1,150) / (517.5) / (520) / 2.5
Warranty / 0 / (110) / 110 / 49.5 / 0 / 49.5
20x9–45%
Capital assets / 4,250 / 5,200 / (950) / (427.5) / (517.5) / 90
Warranty / 0 / (335) / 335 / 150.75 / 49.5 / 101.25

Journal Entries (amounts in thousands):

20x6 Entry

Deferred income tax—capital assets...... 240,000

Deferred income tax—warranty...... 16,000

Deferred income tax asset—LCF ($360 x .40)...... 144,000

Income tax expense (recovery)...... 400,000

20x7 Entries

Deferred income tax—capital assets...... 40,000

Deferred income tax—warranty...... 16,000

Income tax payable ($40 x .4)...... 16,000

Income tax expense (recovery)...... 8,000

Income tax payable...... 16,000

Deferred income tax asset—LCF...... 16,000

Gross LCF now $360,000 – $40,000 = $320,000; recorded at 40%, or $128,000

20x8 Entries

Income tax expense...... 965,000

Deferred income tax —capital assets...... 2,500

Deferred income tax —warranty...... 49,500

Income tax payable ($2,260 × .45)...... 1,017,000

Income tax payable ($320 × .45)...... 144,000

Deferred income tax asset—LCF ($144 – $16)...... 128,000

Income tax expense ($320 × (.45 – .40))...... 16,000

20x9 Entry

Income tax expense...... 1,800,000

Deferred income tax—warranty...... 101,250

Deferred income tax—capital assets...... 90,000

Income tax payable ($4,425 × .45)...... 1,991,250

Assignment 16-27

Carryback

Of the $220,000 tax loss, $120,000 can be carried back to the preceding three years. The carryback will result in CTC’s realizing a full refund of taxes paid in 20x1, 20x2, and 20x3. The total refund will be $45,600.

Carryforward

The remaining $100,000 of the 20x4 tax loss can be carried forward and applied against taxable income in the next 20 years. Since management believes that the probability of realizing the future tax benefits is greater than 50%, the deferred income tax benefit should be recognized in the year of the loss, 20x4. The 20x5 enacted rate of 36% can be used. A deferred income tax asset of $36,000 will be recognized.

Temporary differences

20x3 – 40%Temporary DifferenceEnding Balance

Capital assets $95,000* deferred $38,000*cr.

Pensions 55,000* deferred 22,000* cr.

$60,000 cr.

20x4 – 36%

Capital assets $85,000** deferred $30,600cr.

Pensions 85,000** deferred 30,600 cr.

$61,200 cr.

* given

** ($95,000 – $10,000); ($55,000 – $30,000 + $60,000)

Journal entry to record income tax:

Income tax receivable...... 45,600

Deferred income tax—LCF...... 36,000

Income tax expense...... 80,400

Deferred income tax—long term ($61,200 – $60,000).. 1,200

Lower portion of income statement

Income (loss) from operations before income tax ...... ($200,000)

Income tax (recovery)...... 80,400

Net income (loss)...... ($119,600)