Question

During 2021, its first year of operations, American Laminating Corporation reported an operating loss of $120 million for financial reporting and tax purposes. The enacted tax rate is 25%. In 2019, American reported a pretax accounting income of $40 million and applies a net operating loss carryforward up to 80% of taxable income. Which of the following is incorrect?

a. Income tax payable in 2018 is zero.
b. Net loss in 2018 is $79 million.
c. The deferred tax asset balance at the end of 2018 is $21 million.
d. The deferred tax asset balance decreases in 2019.
e. Income tax expense in 2019 is zero.

Answer 1

Answer: e. Income tax expense in 2019 is zero.

Explanation:

There will still be an income tax in 2019 so the above statement is incorrect.

American applies net operating loss carryforward up to 80% of taxable income which means that their taxable income is:

= 40,000,000 * ( 1 - 80%)

= $8,000,000

Income tax expense for 2019:

= 25% * 8,000,000

= $2,000,000