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 2012, Peridot elected to carry back its operating loss. The enacted income tax rate was 40%. In its 2013 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 2012, Peridot elected to carry back its operating loss. The enacted income tax rate was 40%. In its 2013 income statement, what amount should Peridot report as current income tax payable?

Quizplus · Accepted Answer

Peridot Jewelers had an operating loss of $200,000 in 2012, which it elected to carry back. The tax refund from carrying back the loss is calculated as follows: 
Tax refund = operating loss x applicable tax rate = $200,000 x 40% = $80,000

Therefore, Peridot will receive a tax refund of $80,000 in 2013, which will reduce its current income tax payable. The remaining income tax payable is calculated as follows:

Operating income (loss) in 2013 = $60,000 
Taxable income = $60,000 - $80,000 (tax refund) = ($20,000)

Since there is a tax refund, the income tax payable will be negative, which means that Peridot will receive an additional tax refund of $110,000 ($80,000 refund from carrying back the loss and $30,000 from the negative income tax payable).

Therefore, the correct answer is B) $110,000.

In Its First Four Years of Operations Peridot Jewelers Reported