Operating Tax Losses

NOTE:   Each of the tax situations listed below is independent.

a) In 2020, its 1st year of operations, Reckoner Inc. has a net operating loss of ($220,000).   Assume Reckoner management thinks that, at the end of 2020, that it is unlikely that the loss carryforwards will be realized in the future. Then in 2021, Reckoner has $120,000 in taxable income. Now management believes Reckoner will continue to be profitable in the future. Assume income tax rates of 25% in 2021 and 20% in 2020 respectively.

Required: Prepare the required entries based on the above information.

    

b) In 2020, its first year of operations, Stockli Inc. has a net operating loss of ($300,000).   Assume the management of Stockli Inc. thinks at the end of 2020, that it is unlikely that the loss carryforward will be realized in the near future. Then, in 2021, Stockli has $525,000 in taxable income. Assume tax rates of 16% and 14% in 2021 and 2020 respectively. The tax rate in 2022 and onwards is expected to be 15%.

Required: Prepare the required entries based on the above information.

c) In 2019, its first year of operations, Forefront Inc. has a net operating loss of ($100,000) when the tax rate was 17%.

Assume the management of Forefront Inc. thinks at the end of 2019, that it is unlikely that the loss carryforward will be realized in the near future.   In 2020, Forefront has another ($55,000) taxable loss and the tax rate is 15%. Assume due to the development of a new manufacturing process that reduces costs significantly, that at the end of 2020 Forefront management now believes it is now more likely than not that they will have >$300,000 of taxable income in 2021. The tax rate enacted for 2021 and onwards is expected to be 18%.

Required: Prepare the required entries based on the above information.          

d) Assume that Majesty Skis Ltd. incurred a ($6,000,000) loss in fiscal 2021 due to losing a very large lawsuit which was a one-time extraordinary event. Majesty Skis Ltd. also had taxable income of $4,000,000 in fiscal 2017 when the tax rate was 15%. The company broke even in 2019 – 2020. Tax rates are expected to decrease in the future to 10%. The company is still very short of cash from losing the lawsuit.

Required: Prepare the required entries based on the above information.          

e)   In its first year of operations, 2018, Candide Ltd. reports taxable income of $70,000 and paid 30% in income taxes. It is now the end of 2019, and Candide Ltd. has a loss of ($200,000) for tax purposes. Candide’s management believes it is likely the company will be able to use up its tax losses as sales are now increasingly rapidly. The tax rate is currently 30% but rates are expected to decrease to 20% starting in 2020. The company is not short of cash but does wish to maximize profit in all years.

Required: Prepare the required entries based on the above information.

Answer rating: 100% (QA)

Required Prepare the required entries based on the above information e In its first year of operations 2018 Candide Ltd reports taxable income of 70000 and paid 30 in income taxes It is now the end of ... View the full answer