Question

Cabot Company reported a pretax operating loss of $50,000 for financial reporting and tax purposes in 2018. The enacted tax rate is 40% for 2018 and subsequent years. Assume that Cabot requests a refund of taxes already paid by electing a loss carryback. Taxable income, tax rates, and income taxes paid in Cabot's first four years of operations were as follows: Taxable Tax Taxes income rates paid 2014 $30,000 30% $9,000 2015 35,000 30% 10,500 2016 42,000 35% 14,700 2017 40,000 40% 16,000 Required: (1) Prepare the journal entry to record Cabot's income taxes for the year 2018. Show well-labeled computations. (2) Compute Cabot's net loss for 2018.

Answer 1

Answer and Explanation:

1.

Net Operating loss carryback Amount Rate of Tax Tax Recorded as

Carried back - 2014 $0.0 30% $0.0

Carried back - 2015 $0.0 30% $0.0

Carried back - 2016 $42,000 35% $14,700.0

Carried back - 2017 $8,000.0 40% $3,200.0

Total Carryback $50,000.0 $17,900.0

Journal Entries - Cabot Company

Date Particulars Debit Credit

31-Dec-18 Receivables - Income Tax Refund $17,900

To Income tax benefit - Net Operating Loss $17,900

2. Cabot's net loss for 2018 = -$50,000 + $17,900

= ($32,100)