Podcast
Questions and Answers
What is one of the primary benefits of using net operating loss (NOL) deductions for a business?
What is one of the primary benefits of using net operating loss (NOL) deductions for a business?
What happens to net operating losses (NOL) that are carried forward after 20 years?
What happens to net operating losses (NOL) that are carried forward after 20 years?
During which phase do companies typically incur net operating losses (NOL)?
During which phase do companies typically incur net operating losses (NOL)?
What is the first step in maximizing the savings from a net operating loss (NOL)?
What is the first step in maximizing the savings from a net operating loss (NOL)?
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What must a company do to utilize a net operating loss for tax purposes?
What must a company do to utilize a net operating loss for tax purposes?
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If a company incurs an NOL, which of the following outcomes is NOT possible?
If a company incurs an NOL, which of the following outcomes is NOT possible?
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According to the guidelines, how long can NOL carry forwards be recorded as deferred tax assets?
According to the guidelines, how long can NOL carry forwards be recorded as deferred tax assets?
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What was the total income tax expense reported by ABC Company at the end of 2015?
What was the total income tax expense reported by ABC Company at the end of 2015?
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In an example of net operating loss calculations, what was the tax paid by Groh Inc. in 2011?
In an example of net operating loss calculations, what was the tax paid by Groh Inc. in 2011?
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What is the deferred tax liability reported by ABC Company at the end of 2015?
What is the deferred tax liability reported by ABC Company at the end of 2015?
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What adjustment impacted the deferred tax liability for ABC Company between 2014 and 2015?
What adjustment impacted the deferred tax liability for ABC Company between 2014 and 2015?
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Based on the calculations provided, what is the current tax expense for Starfleet Corporation in 2019?
Based on the calculations provided, what is the current tax expense for Starfleet Corporation in 2019?
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What was the deferred tax liability at the beginning of 2015 for ABC Company?
What was the deferred tax liability at the beginning of 2015 for ABC Company?
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What is the total amount taxable for Starfleet Corporation in 2021?
What is the total amount taxable for Starfleet Corporation in 2021?
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By how much did the deferred tax liability change for ABC Company at the end of 2016?
By how much did the deferred tax liability change for ABC Company at the end of 2016?
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What was Starfleet Corporation's pretax financial income for 2018?
What was Starfleet Corporation's pretax financial income for 2018?
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What is the taxable income for Groh in 2015 after considering the NOL carry forward?
What is the taxable income for Groh in 2015 after considering the NOL carry forward?
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How much does Groh record for Income Taxes Payable in 2015?
How much does Groh record for Income Taxes Payable in 2015?
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What is the total Income Tax Expense recorded by Groh in 2015?
What is the total Income Tax Expense recorded by Groh in 2015?
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If Forward Company experiences a pretax operating loss of $60,000, what is the deferred tax asset created at a 30% tax rate?
If Forward Company experiences a pretax operating loss of $60,000, what is the deferred tax asset created at a 30% tax rate?
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For the remaining NOL that cannot be carried back, how should a deferred tax asset be recognized?
For the remaining NOL that cannot be carried back, how should a deferred tax asset be recognized?
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Which of the following tax rates corresponds to the estimated taxable income in 2019 for recognizing a deferred tax asset?
Which of the following tax rates corresponds to the estimated taxable income in 2019 for recognizing a deferred tax asset?
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What effect do the NOL carry forward benefits have on the Deferred Tax Asset account for Groh in 2015?
What effect do the NOL carry forward benefits have on the Deferred Tax Asset account for Groh in 2015?
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When creating an income statement, why doesn’t Groh report the tax effects of the loss carry back or carry forward?
When creating an income statement, why doesn’t Groh report the tax effects of the loss carry back or carry forward?
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What is the total deferred tax asset recognized in 2017?
What is the total deferred tax asset recognized in 2017?
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Which tax rate was applied to compute the deferred tax asset for 2018?
Which tax rate was applied to compute the deferred tax asset for 2018?
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How is the deferred tax asset classified on the balance sheet?
How is the deferred tax asset classified on the balance sheet?
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What causes the temporary difference to reverse or turn around?
What causes the temporary difference to reverse or turn around?
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What was the NOL adjusted balance for 2019?
What was the NOL adjusted balance for 2019?
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Which component is recognized in the journal entry related to deferred tax assets?
Which component is recognized in the journal entry related to deferred tax assets?
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Which factor leads to a decrease in the value of the tax loss carry forward?
Which factor leads to a decrease in the value of the tax loss carry forward?
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Which NOL balance represents the start of the year balance for 2019?
Which NOL balance represents the start of the year balance for 2019?
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What is the term used for the allocation of income tax expense to various operations and items within an income statement?
What is the term used for the allocation of income tax expense to various operations and items within an income statement?
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Which of the following is NOT a significant component that companies should disclose regarding income tax expense for continuing operations?
Which of the following is NOT a significant component that companies should disclose regarding income tax expense for continuing operations?
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What type of tax is based on the gross sales value and does not count as income tax?
What type of tax is based on the gross sales value and does not count as income tax?
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Which of the following accurately describes a deferred tax asset?
Which of the following accurately describes a deferred tax asset?
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What is the function of government grants in relation to income tax expense?
What is the function of government grants in relation to income tax expense?
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Which adjustment is related to changes in the realizability of a deferred tax asset?
Which adjustment is related to changes in the realizability of a deferred tax asset?
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Which of the following taxes is specifically highlighted as not being classified as income tax?
Which of the following taxes is specifically highlighted as not being classified as income tax?
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Which of the following is an example of a tax that may not meet the definition of income tax depending on specific terms?
Which of the following is an example of a tax that may not meet the definition of income tax depending on specific terms?
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Study Notes
Income Tax Expense and Journal Entries
- Income tax expense for 2014 totaled Br 28,000.
- Income taxes payable for 2014 was Br 16,000, and deferred tax liability was Br 12,000.
- For 2015, the difference between book and tax basis of accounts receivable was Br 10,000.
- Deferred tax liability for 2015 computed as Br 4,000 (Br 10,000 x 40%).
- Income taxes payable for 2015 amounted to Br 36,000.
2015 Journal Entry
- Total income tax expense reported: Br 28,000.
- Change in deferred tax liability for 2015 was Br 8,000.
- Recorded journal entry for income tax consisted of:
- Income Tax Expense: Br 28,000
- Deferred Tax Liability: Br 8,000
- Income Taxes Payable: Br 36,000.
Deferred Tax Liability Changes
- At end of 2016, deferred tax liability decreased by Br 4,000.
- Deferred tax liability accounts showed:
- 2015: Br 8,000
- 2014: Br 12,000
- Final balance for deferred tax liability at the end of 2016 was zero.
Net Operating Loss (NOL) Implications
- Temporary differences can create future taxable amounts in subsequent years.
- NOL allows companies to reduce past taxes or offset future taxable income.
- Efficiently applying NOL through carrybacks (2 years) and carryforwards (up to 20 years) maximizes tax savings.
Common NOL Considerations
- Start-ups often incur NOLs due to high initial expenses relative to income.
- With NOLs, companies may not owe taxes, can receive refunds, or can carry forward losses.
NOL Carry Forward Example
- Groh Inc. example showing taxable loss of Br 500,000 in 2014 translates to potential deductions in future profitable years.
- Taxable income for 2015 projected at Br 250,000 (before NOL), with NOL deduction reducing it to Br 50,000.
Deferred Tax Asset Recognition
- Deferred tax asset of $8.8 million recognized by utilizing NOL carry forwards against expected future taxable income.
- Standard journal entry to record the deferred tax asset reflected in:
- Deferred tax asset: $8.8 million
- Income tax expense (benefit): $8.8 million.
Financial Statement Presentations
- Balance sheet should report deferred tax accounts as net current and noncurrent amounts.
- Deferred tax assets/liabilities should relate to corresponding assets or liabilities and adjusted based on expected reversals.
Income Statement Tax Allocation
- Income tax expense split into continuing operations, discontinued operations, extraordinary items, and prior period adjustments.
- Significant disclosures for tax expense include:
- Current tax expense or benefit.
- Deferred tax expense or benefit.
- Operating loss carryforward benefits.
Taxes Not Classified as Income Tax
- Sales taxes based on sales value do not constitute income tax.
- Consumption taxes like VAT or GST also fall outside the income tax category.
- Production taxes can vary in classification based on regulatory terms.
- Employee benefit taxes and stamp duties are typically excluded from income tax calculations.
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Description
This quiz covers the computation of income tax expense for the year 2015, focusing on the differences between book basis and tax basis. It includes journal entries related to income tax expense and the related payable and deferred liability accounts. Test your understanding of tax accounting principles!
