In its first four years of operations Peridot Jewelers reported the following operating income (loss)amounts:
There were no other deferred income taxes in any year.In 2015,Peridot elected to carry back its operating loss.The enacted income tax rate was 40%.In its 2016 income statement,what amount should Peridot report as current income tax payable?

Question

In its first four years of operations Peridot Jewelers reported the following operating income (loss)amounts: 
There were no other deferred income taxes in any year.In 2015,Peridot elected to carry back its operating loss.The enacted income tax rate was 40%.In its 2016 income statement,what amount should Peridot report as current income tax payable?

Quizplus · Accepted Answer

Peridot Jewelers elected to carry back its operating loss from 2015, which means it can apply the loss to its previous year's taxable income and receive a refund of the taxes paid in those years. Therefore, the operating loss for 2015 will result in a tax refund, not a tax payable. The amount of the refund will be 40% of the operating loss, which is ($600,000 x 40%) = $240,000. 
In 2016, Peridot Jewelers will not report any deferred tax assets or liabilities since there were no deferred income taxes in previous years. The current income tax payable will be calculated based on the taxable income for 2016, which is ($800,000 - $600,000 + $240,000) x 40% = $110,000. Therefore, the correct answer is B.

In Its First Four Years of Operations Peridot Jewelers Reported