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Net Operating Loss (NOL)

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Shep King Corporation reported the following pretax financial income (loss) for the years 2000 through 2007.

Pretax Financial Income (Loss) Tax Rate

2000 $80,000 30%
2001 $34,000 35%
2002 $96,000 50%
2003 ($300,000) 40%
2004 $180,000 40%
2005 $60,000 40%
2006 $210,000 40%
2007 ($120,000) 45%

1. Pretax financial income (loss) and taxable income (loss) were the same for all years.

2. Assume the carry-back provision is employed for net operating losses. Also, assume that it is more likely than not that the benefits of a loss carry-forward will be realized.

3. Tax rates for 2008-2010 have been enacted at 50%.

Instructions:

A. What entry(ies) for income taxes should be recorded for 2003 and 2004?

B. How should the income tax expense section of the income statement for 2003 and 2004 appear?

C. What entry(ies) for income taxes should be recorded for 2007?

D. How should the income tax expense section of the income statement for 2007 appear?

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Solution Summary

Guidelines for recording entries for income taxes are provided.

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A. What entry(ies) for income taxes should be recorded for 2003 and 2004?

2003:
Tax Refund receivable 59,900 (50%*96,000 + 35%*34,000)
Income Tax Expense 59,900

2004
Tax Refund receivable ...

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