P18.2 (LO 1, 2) (One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate) The pretax financial income of Truttman AG differs from its taxable income throughout each of 4 years as follows.

Year Pretax Financial Income Taxable Income Tax Rate 2025 €290,000 €180,000 35%

2026 320,000 225,000 40%

2027 350,000 260,000 40%

2028 420,000 560,000 40%

Pretax financial income for each year includes a non-deductible expense of €30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2025.

Instructions

a. Prepare the journal entries for the years 2025–2027 to record income taxes payable (refundable), income tax expense (benefit), and the tax effects of the loss carryforward. Assume that it is probable that it will realize the benefits of any loss carryforward in the year that immediately follows the loss year.

b. Indicate the effect the 2025 entry or entries has on the December 31, 2025, statement of financial position.

c. Prepare the portion of the income statement starting with “Operating loss before income taxes” for 2025.

d. Prepare the portion of the income statement starting with “Income before income taxes” for 2026.