Question: Baxter Company began operations in 2003 and was profitable through 2006, during which time the tax rate was 30%. At the end of 2007, the

Baxter Company began operations in 2003 and was profitable through 2006, during which time the tax rate was 30%. At the end of 2007, the company reported a pretax operating loss of $135,000 for both financial reporting and income taxes. Because the tax rate was increased to 40% in 2007, the company elects to forgo any carryback of the operating loss. In 2008 the company reported pretax operating income of $150,000.
Required
1. Prepare the income tax journal entry of the Baxter Company at the end of 2007.
2. Prepare the lower portion of Baxter’s 2007 income statement.
3. Explain why Baxter Company elected to forgo any carryback in 2007.
4. Prepare the income tax journal entry of the Baxter Company at the end of 2008.
5. Prepare the lower portion of Baxter’s 2008 income statement.

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