[w4kj4k]

Hi all,

I am getting a bit confused on how Becker is calculating the deferred tax asset for the NOL carry forward.

The question is from F6 – M7 – Question 11

Mobe. Co Reported the following operating income (Loss) for its first three years of operations.

Year 1 – $300,000
Year 2 – ($700,000)
Year 3 – $1,200,000

For each year, there were no deferred income taxes (before year 1). and Mobe’s Effective income tax rate is 30%.
In its Year 2 income tax return, Mobe elected the 2-year carryback of the loss. In its year 3 income statement, what amount should Mobe report as total income tax expense?

A) $240,000
B) $120,000
C) $150,000
D) $360,000

Becker says answer is D.

They use the current year 3 income tax expense of $240,000 and ADD the deferred tax asset of $120,000.

My issue is, I thought you were suppose to SUBTRACT the deferred tax asset from the current year income tax expense, which would result in the answer B) $120,000.

What am I doing wrong? Thanks!

[ChiliChil]

The call of the question is what is the total income tax expense for year 3.

You can arrive at the answer by ignoring the NOL.

The Income Tax Expense in the current period is 360,000 (1,200,000 * .3)

The Income Tax Payable is reduced by the deferred tax asset, but they did not ask what the payable was.

“My issue is, I thought you were suppose to SUBTRACT the deferred tax asset from the current year income tax expense” – This is correct is you are looking for the liability (payable), but it would be 360,000 – 120,000 = 240,000

Hope that helps.

[Author]

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