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Puritan Corp.reported the following pretax accounting income and taxable income for its first three years of operations:
Puritan's tax rate is 40% for all years.Puritan elected a loss carryback.
As of December 31,2016.Puritan was certain that it would recover the full tax benefit of the
NOL that remained after the operating loss carryback.
-What did Puritan report on December 31,2016,as the deferred tax asset for the NOL
Carryforward?

Question

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Puritan Corp.reported the following pretax accounting income and taxable income for its first three years of operations:
  Puritan's tax rate is 40% for all years.Puritan elected a loss carryback.
As of December 31,2016.Puritan was certain that it would recover the full tax benefit of the
NOL that remained after the operating loss carryback.
-What did Puritan report on December 31,2016,as the deferred tax asset for the NOL
Carryforward?

Quizplus · Accepted Answer

According to the information provided, Puritan elected a loss carryback but it is certain that it will recover the full tax benefit of the NOL that remained after the operating loss carryback. Therefore, Puritan can only report a deferred tax asset for the NOL carryforward if it is more likely than not that it will be able to utilize the NOL in future years to reduce taxable income. Since the information does not provide any indication that Puritan will be able to utilize the NOL carryforward, the deferred tax asset for the NOL carryforward would be $0. However, if we assume that Puritan will be able to utilize the NOL carryforward in future years, the deferred tax asset would be calculated as follows:

NOL carryforward = $1,000,000 - ($400,000 + $600,000) = $0
Deferred tax asset = $0 x 40% = $0

Therefore, the correct answer is option C.

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