Final answer:
To handle the loss carryback for Lamb Inc., the $280,000 tax loss from Year 4 is applied to the taxable incomes of Year 1 and Year 2, generating a total tax refund of $70,000.
Step-by-step explanation:
To calculate Lamb Inc.'s loss carryback, we will offset the tax loss of $(280,000) against previous years' taxable income, starting with the earliest year. Since Lamb Inc. has a two-year loss carryback option, we'll apply the loss to Year 1 and Year 2's incomes to recalculate the taxes, given the different tax rates for these years.
Here's the breakdown:
- Year 1 Taxable Income: $252,000
Tax Rate: 25%
Tax Payable: $252,000 * 25% = $63,000 - Year 2 Taxable Income: $224,000
Tax Rate: 25%
Tax Payable: $224,000 * 25% = $56,000
Total tax paid for the 2 years: $63,000 + $56,000 = $119,000.
Now, we apply the tax loss of $(280,000) to the taxable income:
- Adjusted Year 1 Taxable Income: $252,000 - $252,000 = $0 (loss fully applied to Year 1)
- Remaining Loss: $(280,000 - $252,000) = $(28,000)
- Adjusted Year 2 Taxable Income: $224,000 - $28,000 = $196,000
New tax payable after loss for Year 2: $196,000 * 25% = $49,000
Total tax after loss for both years: $0 (Year 1) + $49,000 (Year 2) = $49,000
Lamb Inc. can recover the difference as a tax refund:
Total refund: Original tax paid - New tax after loss = $119,000 - $49,000 = $70,000
The entry on December 31 of Year 4 for the tax refund due from the loss carryback will be:
- Debit: Income Tax Refund Receivable $70,000
- Credit: Income Tax Benefit (Profit and Loss) $70,000