[Anonymous]

Becker Question – Dodd Corp. is preparing its December 31 financial statements and must determine the proper accounting treatment for the following situations:

For the year ended December 31, Dodd has a loss carry forward of $180,000 available to offset future taxable income.
However, there are no temporary differences.

On December 30, Dodd received a $200,000 offer for its patent. Dodd’s management is considering whether to sell the
patent. The offer expires on February 28 of the next year. The patent has a carrying amount of $100,000 at December
31.

Assume a current and future income tax rate of 30%. In its income statement, Dodd should recognize an increase in net income of:

a. $124,000
b. $70,000
c. $54,000
d. $0 – Correct Answer

Explanation:

Choice “d” is correct, $0 increase in net income. U.S. GAAP does permit recognition of “net operating loss carry forward” in year of loss, but the deferred asset should be reduced by a “valuation allowance” based on the “more likely or not” test of expected realization. In this case, there does not appear to be enough evidence to support realization. Unless evidence is provided to the contrary, it is generally assumed that an NOL in the current period means that there is a greater than 50% chance that there will be NOLs in future periods. Therefore, a “valuation allowance” should reduce the deferred asset to zero, and result in no increase in net income. Accounting recognition is not given to offers to sell assets because a completed transaction has not occurred.

Can someone please explain the reasoning behind this answer in a more simple manner?

 

 

[Need2PassREG]

What is the correct answer?

This is the explanation as of 04/28/18 from Ninja CPA

Deferred tax assets are measured by the total temporary differences multiplied by the tax rates in effect when the tax differences unwind. The loss carryforward is recognized as a deferred tax asset at the total future deductible amount multiplied by the future tax rate that will be available for the later tax deductions. All deferred tax liabilities and deferred tax assets are classified on the balance sheet as noncurrent.
Thus, the deferred tax asset is a tax benefit (lowering of this year’s income tax expense) and will increase net income by the total amount of the expected benefit amount of $54,000 ($180,000 deduction × 0.30 (the future tax rate of 30%)).
The other gain is not recognized until the sale is finalized and agreed to by both parties.

The correct answer as of 04/28/18 is $54,000?

[Anonymous]

The sell of the patent ismt a sure thing. You cant say it's probable since management is only THINKING about selling it. You dont recognize (book) anything. It would be nice to book thoughts, but we cant- think of it that way.
For a loss, losses aren't carried forward. Why? They're on the income statement and the income statement closes and all accounts reset to zero.
Answer is zero. Correct?

[Author]

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