Question

Assume that Peridot operates in an industry for which NOL carryback is not allowed. In its first four years of operations Peridot Jewelers reported the following operating income (loss) amounts: 2018 $ 150,000 2019 100,000 2020 (425,000 ) 2021 450,000 There were no other deferred income taxes in any year. The enacted income tax rate was 25%. In its 2021 income statement, what amount should Peridot report as current income tax payable?

Answer 1

Answer:

Peridot

In its 2021 income statement, what amount should Peridot report as current income tax payable is:

$22,500.

Explanation:

a) Data and calculations:

Operating income (loss) amounts:

2018 $ 150,000

2019    100,000

2020 (425,000 )

2021   450,000

Income tax rate = 25%

2021 Current income tax payable

2021 Net operating profit  450,000

2020 Net operating loss  (360,000) limited to 80% of $450,000

Taxable profit after relief    90,000

= 25% of $90,000 = $22,500

b) Since the Net Operating Loss (NOL) carryback is not allowed in the Peridot's industry, it implies that it can only carry forward its operating loss to future years (not get any loss relief from previous years). Therefore, the NOL of $425,000 will be carried forward to 2021 and beyond.  However, the loss relief in the 2021 is limited to 80% of 2021 operating income of $450,000.  The unrelieved portion of $65,000 ($425,000 - $360,000) will be carried forward to 2022.