Net Operating Loss (NOL) Carryback and Carry forward
The following historical financial data are available for Lexis Company.
|
Year |
Income |
Tax Rate |
Tax Paid |
|
2005 |
$500,000 |
35% |
$175,000 |
|
2006 |
150,000 |
30 |
45,000 |
|
2007 |
30,000 |
30 |
9,000 |
In 2008, Lexis Company suffered a $1 million net operating loss. The company will use the carryback provision of the tax law.
1. Using the information given, calculate the refund due for the loss carryback and the amount of the loss available to carry forward to future periods. Assume that the enacted tax rate for 2008 and all future years is 40%.
2. Prepare journal entries to record the loss carryback and carry forward. Assume that it is more likely than not that future taxable income will be sufficient to allow for the full realization of any deferred tax assets.
3. Evaluate the reasonableness of the assumption in (2).