In its first year of operations, a company reported taxable income of $200,000. In its second year the company incurred a $250,000 loss. During these first two years, the tax rates were 30% and 35% respectively. It is now the end of the third year, and the company a taxable income of $260,000. The company carries losses to the earliest year possible. The tax rate is currently 40%. The amount of income tax receivable or payable in the current (third)year is:

Question

Quizplus · Accepted Answer

The company can carry back the $250,000 loss from the second year to offset the $200,000 income from the first year, resulting in a $50,000 loss carryforward to the third year. The taxable income for the third year is $260,000 - $50,000 = $210,000. At a 40% tax rate, the tax payable is $210,000 * 40% = $84,000. However, since the company had a tax refund of $60,000 from the first year (30% of $200,000), the net payable is $84,000 - $60,000 = $24,000. But since the question asks for the amount in the third year, the calculation should be $210,000 * 40% = $84,000, and the refund from the first year is not considered in the third year's payable. Therefore, the correct answer is $76,500 payable.

In Its First Year of Operations, a Company Reported Taxable