Saucy Inc. reported a taxable and accounting loss of $130,000 for 2017. Its pre-tax accounting income for the last two years was as follows: The amount that Saucy reports as a net loss for financial reporting purposes in 2017, assuming that it uses the carryback provisions, and that the tax rate is 25% for all years involved, is

Question

Saucy Inc. reported a taxable and accounting loss of $130,000 for 2017. Its pre-tax accounting income for the last two years was as follows:  The amount that Saucy reports as a net loss for financial reporting purposes in 2017, assuming that it uses the carryback provisions, and that the tax rate is 25% for all years involved, is

Quizplus · Accepted Answer

Since Saucy has a taxable loss in 2017, it can carry that loss back to previous years and potentially receive a tax refund. To do this, Saucy must first calculate its taxable income for each of the two preceding years.

For year 2015: 
Taxable income = $240,000 
Tax payable = $60,000

For year 2016: 
Taxable income = $160,000 
Tax payable = $40,000

Saucy can carry its 2017 loss back to these years and reduce its tax payable. Assuming it chooses to carry back the entire loss, Saucy will receive a tax refund of $32,500 ($130,000 x 25%).

However, for financial reporting purposes, Saucy must still recognize the loss in 2017. Based on the information given, it is not clear whether Saucy has any other tax credits or deductions that would further reduce its tax payable. Therefore, the net loss that Saucy would report for financial reporting purposes in 2017 is $97,500 ($130,000 - $32,500).

Therefore, the correct answer is B.

Saucy Inc Reported a Taxable and Accounting Loss of $130,000 for for 2017