Question

Tanner, Inc. incurred a financial and taxable loss for 2016. 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 2016 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 2016.

Answer 1

The refund claimed from the carryback of a financial and taxable loss should be shown as a reduction of the loss in the 2016 financial statements.

Step-by-step explanation:

The correct answer is d. The refund claimed should be shown as a reduction of the loss in 2016.

When a company incurs a financial and taxable loss, it can use the carryback provisions to apply the loss to previous profitable years. In this case, Tanner, Inc. has decided to carry back the loss to offset its previous year's profit. This means that the refund claimed from the carryback should be shown as a reduction of the loss in the 2016 financial statements.

Reporting the carryback as a prior period adjustment (option a) or a deferred charge amortized over five years (option b) would not accurately reflect the impact of the carryback on the 2016 financial statements. Similarly, reporting the refund claimed as revenue in the current year (option c) would not be appropriate as the refund is related to a prior year's loss.