Studios reported a net capital loss of $38,500 in Year 5. It reported net capital gains of $31,000 in Year 4 and $44,000 in Year 6. What is the amount and nature of the book-tax difference in Year 6 related to the net capital carryover?
A)$36,500 unfavorable.
B)$36,500 favorable.
C)$7,500 unfavorable.
D)$7,500 favorable.

Question

Quizplus · Accepted Answer

Since Studios reported net capital gains of $44,000 in Year 6, it can use up to $44,000 of its capital loss carryover from Year 5 to offset those gains. This means there will be a book-tax difference of $44,000 - $38,500 = $5,500 in Year 6 related to the net capital carryover. Since the tax savings from this carryover will reduce the company's taxable income and tax liability, this book-tax difference is favorable. Therefore, the answer is (D) $7,500 favorable, which is the tax savings of $5,500 multiplied by the statutory tax rate of 30%.

Studios Reported a Net Capital Loss of $38,500 in Year