Question

In its first four years of operations cordelli resorts reported the following operating income (loss) amounts: 2003 $300,000 2004 200,000 2005 (850,000) 2006 900,000 there were no other deferred income taxes in any year. in 2005, cordelli elected to carry back its operating loss. the enacted income tax rate was 40%. in its 2006 income statement, what amount should cordelli report as income tax expense?

a) $160,000
b) $220,000
c) $340,000
d) $360,000

Answer 1

In 2006, Cordelli Resorts should report d)$360,000 as income tax expense.

Step-by-step explanation:

In 2006, Cordelli Resorts should report $360,000 as income tax expense.

To calculate the income tax expense, we need to consider the operating income (loss) amounts for the first four years. In 2003 and 2004, Cordelli had positive operating income of $300,000 and $200,000, respectively. Then, in 2005, they had an operating loss of $850,000. Since Cordelli elected to carry back its operating loss to 2004, they can use the loss to offset the operating income of that year.

The total taxable income for 2004, after offsetting the loss from 2005, would be $200,000 - $850,000 = -$650,000. However, the tax authorities only allow negative taxable income to be carried back for two years. So, Cordelli can only carry back the loss to 2004 and not to 2003.

Using the enacted income tax rate of 40%, the income tax expense for 2006 would be $900,000 (operating income for 2006) x 40% = $360,000.