Baxter Company began operations in 2006 and was profitable through 2009, during which time the tax rate was 30%. At the end of 2010, 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 2010, the company elects to forgo any carryback of the operating loss. In 2011, 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 2010.

2. Prepare the lower portion of Baxter’s 2010 income statement.

3. Explain why Baxter Company elected to forgo any carryback in 2010.

4. Prepare the income tax journal entry of the Baxter Company at the end of 2011.

5. Prepare the lower portion of Baxter’s 2011 income statement.