Redbud began operations at the beginning of Year 1, and has one depreciable asset with an original cost of $400, acquired at the start of Year 1. Redbud uses straight-line depreciation over 5 years for financial reporting and MACRS (3-year asset). Information about carrying value and tax basis of the asset is found in the table below.

	Book		Tax
year	Depreciation	Carrying Value	MACRS	Tax basis
1	80	320	133	267
2	80	240	178	89
3	80	160	59	30
4	80	80	30	-
5	80	-

In Year 1, Redbud had a small amount of positive net income and positive taxable income. In Year 2, Redbud experienced a $2,500 loss for net income. Redbud is not in an industry that is eligible for the carryback option, so Redbud will carry the loss forward. Redbud’s tax rate is 30%.

Requirements:

1. Calculate the net operating loss for Year 2.

2. What amount will Redbud carry forward?

3. Prepare the journal entry to record income taxes for Year 2.

4. Assume that Redbud only expects to realize 60% of the tax carryforward in future years. Prepare the necessary journal entry to adjust for this expectation.

5. In Year 3, Redbud earned net income of $300. What amount of the carryforward will Redbud be allowed to use in to offset income on its tax return in Year 3?

6. Prepare the Year 3 journal entry to record income taxes. Redbud still expects to realize only 60% of the tax carryforward.

Answer rating: 100% (QA)

CALCULATION OF NET OPERATING LOSS NET OPERATING LOSS FOR YEAR 3 NET LOSS 2000 INCOME TA... View the full answer