[goods4188]

This question has the wrong info or the wrong anwser and it is really messing with my head.. Confirmation please.

Income Tax Rate

Year 4 $20,000 30%

Year 5 $15,000 25%

Year 6 (100,000) 25%

Year 7 $70,000 40%

What amount of income tax liability will Zues Corporation record in Year 6 if they elect to use the 2-7ear CB/20-year CF option and they do not expect to have taxable earnings after year 7.

The answer according to Becker is $11,750 with this explination:

the refund is obviously 20,000 x .3 ($6000) + 15,000 c .25 ($2750) = $9750 I get this as its the same for all problems like this regardless of furture earnings

the carry forward (according to becker) should ALL be used in the next year based on (100,000 – 35,000 used = 65,000 left over to be carried forward at a 40% tax rate is 26,000 deferred tax asset of which all will be used in year 7 because we have more income than what we are carrying forward. BUT! in the explanation they say that the income that should be used is $5000 for year 7 (70000-65000) what!? which if this was true and the fact pattern said that income in year 7 was $5000 i would agree because we arnt getting to use 60000 of the carry forward assuming there is no income after year 7. But according to the fact pattern/question YEAR 7 has $70,000 in income so we CAN use all 65,000 prior losses in year 7….. why does becker subrtact the loss from year 6 thats left over from the carryback and then take a valluation allowance? I am SO confused……

[forever4]

I'm actually confused by your question. However, remember NOL is carried back 2 years THEN 20 years. The loss in year 6 is 100k. If you carry back 2 years, the amount that will carry forward to year 7 would be 65k. In Year 7, you have total income of 70k. Therefore, after subtracting the 65k from the carry forward amount, you have to pay the tax on the 5k!

Does that make sense?

Thanks

FAR 5/14 88 PASSED!
REG 7/13 74 :((((((((....! I cant believe it!!!! I studied so hard...
REG retake 11/29 -> 89!!!!!!!!!!!!!!!!!!!
BEC 10/11/12 -> 84!!!!!!!!!!!!!
AUD 10/25/12 -> 95!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

I'm DONE! OMG 8 months of hard work.

I SHALL PASS. BECAUSE IT'S ME, SO EVERYTHING WILL BE OK!

[goods4188]

sorry, im going to try and explain it better… Becker says asked for the tax benefit if there is no earnings after year 7. They give this journal entry to explain why the anwser is $11,750:

NOL Carryforward $65,000

Less: Year 7 Income (5000)

---

> this is what i dont get… along with next line

Unusable Carry forward =$60,000

---

> what!? ITS NOT UNUSABLE! we just used it to lower taxable income for year 7 we used all of it too, non is left over.

Then they say take the Unusable portion of 60,000 x .4 (year 7 tax rate) and that is our valuation allowance… which leads to the journal entry

income tax refund 9750

deferred tax asset – current 26000

Income tax benefit 11750 (Plug)

Valuation Allowance 24,000

What i am saying is that the valuation allowance is wrong because we had to use the full amount of the carry forward in year 7 so there isnt any that is not useable in future years.

Does that make more sense?

[momto5]

I vaguely remember that question, that it was incorrect info or something. Did you check the FAR corrections for Becker?

FAR - 92 (4/27/12)
AUD - 96 (7/17/12)
BEC - 92 (8/30/12)
REG - 91 (11/12/12)

[goods4188]

No! I didnt even know that existed… where do i find that information?

[Author]

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