Question

Tanner, Inc. incurred a financial and taxable loss for 2010. Tanner therefore decided to use the carryback provisions as it had been profitable up to this year. How should the amounts related to the carryback be reported in the 2010 financial statements?

a. The reduction of the loss should be reported as a prior period adjustment.
b. The refund claimed should be reported as a deferred charge and amortized over five years.
c. The refund claimed should be reported as revenue in the current year.
d. The refund claimed should be shown as a reduction of the loss in 2010.

Answer 1

The refund from the loss carryback should be reported as an income tax benefit in the income statement for 2010, reducing Tanner, Inc.'s net loss for that year.

Step-by-step explanation:

When Tanner, Inc. decides to use the carryback provisions due to a financial and taxable loss for 2010, the refund arising from this loss carryback should be reported in the financial statements for 2010. The correct way to present this refund is by treating it as a tax benefit and recognizing it as an asset. The amount of the refund or the receivable from the government should be reported as an income tax benefit in the income statement, which effectively reduces the net loss of the current year. This treatment aligns with the accounting principle of matching, where the benefit is matched with the loss that generated it within the same period.