Studios reported a net capital loss of $39,000 in Year 5. It reported net capital gains of $32,000 in Year 4 and $45,000 in Year 6. What is the amount and nature of the book-tax difference in Year 6 related to the net capital carryover?
A) $38,000 unfavorable.
B) $38,000 favorable.
C) $7,000 unfavorable.
D) $7,000 favorable.

Question

Quizplus · Accepted Answer

The book-tax difference in Year 6 is $7,000 favorable because the studio can carry over the $39,000 net capital loss from Year 5 to offset the $45,000 net capital gain in Year 6, resulting in a taxable gain of $6,000. However, since it had a $32,000 gain in Year 4, the total carryover used in Year 6 would be $7,000 ($39,000 - $32,000), leaving a net gain of $38,000 ($45,000 - $7,000) for book purposes but only $32,000 for tax purposes. This results in a favorable book-tax difference because the taxable income is lower than the book income.

Studios Reported a Net Capital Loss of $39,000 in Year