Does this explanation make sense?
Mobe Co. reported the following amounts of taxable income (operating loss) for its first 3 years of operations:
Year 2
$ 300,000
Year 3
(700,000)
Year 4
1,200,000
For each year, Mobe had no temporary differences, and its effective income tax rate was 30% at all relevant times. In its Year 3 income tax return, Mobe elected to carry back the maximum amount of loss possible. Furthermore, Mobe determined that it was more likely than not that the full benefit of any loss carryforward would be realized. In its Year 4 income statement, what amount should Mobe report as total income tax expense?
A. $150,000
B. $240,000
C. $120,000
D. $360,000
Answer (D) is correct.
A net operating loss (NOL) may be carried back 2 years (earlier year first) and forward 20 years. The taxpayer also may elect to carry the NOL forward only. Mobe’s first year of operations was Year 2, and it elected to carry the NOL back. Thus, it applied $300,000 of the loss (equal to the taxable income for Year 2) to Year 2 and the remaining $400,000 to Year 4. As a result, a deferred tax asset was recognized for the future tax benefit of the NOL. But no valuation allowance was necessary because it was more likely than not that all of the tax benefit would be realized. Accordingly, in Year 3, Mobe recognized a deferred tax asset (a debit) of $120,000 [($700,000 – $300,000 NOL carryback) NOL carryforward × 30%], a tax refund receivable (a debit) of $90,000 ($300,000 NOL carryback × 30%), and a tax benefit (a credit) of $210,000 ($120,000 + $90,000).
Income tax refund receivable
$90,000
Income tax benefit from loss carryback
$90,000
Deferred tax asset
$120,000
Income tax benefit from loss carryforward
$120,000
In Year 4, Mobe’s income tax payable equals $240,000 [($1,200,000 – $400,000 NOL carryforward) × 30%]. Because the benefit of the deferred tax asset is fully realized in Year 4, it is credited for $120,000. Consequently, total income tax expense for the year is $360,000 ($240,000 current portion + $120,000 deferred portion).
This part “Because the benefit of the deferred tax asset is fully realized in Year 4, it is credited for $120,000. Consequently, total income tax expense for the year is $360,000 ($240,000 current portion + $120,000 deferred portion).”
How is it reversed?
the way I understand it, JE's would be:
Y2
DR Refund 90
CR Asset 120
CR Benefit from loss carryforward 90 (income statement)
CR Deferred benefit from loss carryforward 120 (balance sheet I guess?)
Y3
DR Tax exp 360
DR Deferred benefit from loss carryforward 120 (B/S or is it income statement too?)
CR Benefit from loss carryforward 120 (income statement)
CR Asset 120
CR Tax payable 240
Right? Why would it increase tax expense? What goes where?
.