In 2013, its first year of operations, The Genius Corp. had a $ 700,000 net operating loss when the tax rate was 30%. There are no differences between book (GAAP) income and taxable income. In 2013, the management of The Genius Corp. determined that it was more likely than not that it would not realize the loss carryforward in the near future because the company had only been in operations for one year. In 2014, The Genius had $ 300,000 taxable income and the tax rate remained 30%.
Required
a. What are the journal entries in 2013 to record the tax loss carryforward?
b. What journal entries should Genius make in 2014 to record the current and deferred income taxes and to recognize the loss carryforward?
c. Assume that in 2013 management believes that the maximum amount of taxable income available for realization of the NOL carryforward is $ 400,000. Therefore, $ 300,000 of the NOL carryforward is expected to remain unrealized in the future. What journal entries are required to record the 2013 and 2014 tax provisions?
d. Based on your answer to part (c), prepare the footnote, in dollars and percentages, to reconcile the federal tax rate to the firm’s effective (actual) income tax rate for each year presented.