ASSIGNMENT SESSION 7

Due Date: March 26, 2021 (11.59 PM)

Question 1:
Lindemax Inc. reports the following pretax income (loss) for both financial reporting purposes and
tax purposes. (Assume the carryback provision is used for a net operating loss.)
Year Pretax Income (Loss) Tax Rate
2018 £220,000 34%
2019 180,000 34%
2020 (520,000) 38%
2021 440,000 38%
The tax rates listed were all enacted by the beginning of 2018.

Instructions
(a) Prepare the journal entries for the years 2018-2021 to record income tax expense (benefit) and
income tax payable (refundable) and the tax effects of the loss carryback and carryforward,
assuming that the end of 2020 it is probable that the benefits of the loss carryforward will be
realized in the future.
(b) Using the assumption in (a), prepare the income tax section of the 2020 income statement,
beginning with the line “Operating loss before income taxes.”
(c) Prepare the journal entries for 2020 and 2021, assuming that based on the weight of available
evidence, it is probable that one-fourth of the benefits of the loss carryforward will not be
realized.

Question 2:
Pole Co. at the end of 2018, its first year of operations, prepared a reconciliation between pretax
financial income and taxable income as follows:

Pretax financial income € 420,000

Extra depreciation taken for tax purposes (1,050,000)
Estimated expenses deductible for taxes when paid 840,000
Taxable income € 210,000

Use of the depreciable assets will result in taxable amounts of €350,000 in each of the next three
years. The estimated litigation expenses of €840,000 will be deductible in 2021 when settlement is
expected.

Instructions
(a) Prepare a schedule of future taxable and deductible amounts.
(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes
payable for 2018, assuming a tax rate of 40% for all years.