In its first three years of operations Sharp Chairs reported the following operating income (loss) amounts: There were no deferred income taxes in any year. In 2012, Sharp elected to carry back its operating loss. The enacted income tax rate was 35% in 2011 and 40% thereafter. In its 2013 balance sheet, what amount should Sharp report as current income tax payable?

Question

In its first three years of operations Sharp Chairs reported the following operating income (loss) amounts:  There were no deferred income taxes in any year. In 2012, Sharp elected to carry back its operating loss. The enacted income tax rate was 35% in 2011 and 40% thereafter. In its 2013 balance sheet, what amount should Sharp report as current income tax payable?

Quizplus · Accepted Answer

To calculate the current income tax payable for 2013, we need to calculate the taxable income for the year. To do this, we first need to calculate the total taxable income for years 2011 and 2012:

Taxable income 2011 = Operating income 2011 - Operating loss 2012
Taxable income 2011 = $3,000,000 - ($600,000) = $2,400,000

Taxable income 2012 = Operating loss 2012
Taxable income 2012 = ($1,200,000) = ($1,200,000)

Next, we need to calculate the tax liability for each year:

Tax liability 2011 = Taxable income 2011 x Tax rate 2011
Tax liability 2011 = $2,400,000 x 35% = $840,000

Tax liability 2012 = Taxable income 2012 x Tax rate 2011 (due to carrying back the loss)
Tax liability 2012 = ($1,200,000) x 35% = ($420,000)

Then, we need to calculate the tax refund for 2011:

Tax refund 2011 = Excess tax payment 2011 - Tax liability 2012
Tax refund 2011 = $840,000 - ($420,000) = $420,000

Finally, we can calculate the taxable income and tax liability for 2013:

Taxable income 2013 = Operating income 2013 + Tax refund 2011
Taxable income 2013 = $2,100,000 + $420,000 = $2,520,000

Tax liability 2013 = Taxable income 2013 x Tax rate 2013
Tax liability 2013 = $2,520,000 x 40% = $1,008,000

Therefore, the current income tax payable for 2013 is $1,008,000, which is option C.

In Its First Three Years of Operations Sharp Chairs Reported