Catherine Duffy: Welcome back.
Let's wrap up this question on loss carrybacks and loss carryforwards.
Here's the values that we've calculated for the loss carrybacks.
This is the portion that we're going to ask for a refund back.
This is not an expense.
This is a benefit, a credit, to the income tax income statement account.
It's a benefit, as well as the deferred tax asset that we set up will result in a deferred
tax benefit of $8,400.
Here's the 2 numbers related to 2017.
Then, we'll move on and we'll do the accounting for the tax year of 2018.
In 2018, we'll make the assumption that at the end of 2018 we calculated a taxable income
of $20,000.
Now, we need to go and calculate that current tax and deferred tax situation, but knowing
that we had some loss carryforwards left over from 2017 to affect this year's calculation
of taxes.
Now, we've fast forwarded a year and we're in 2018.
We're doing the calculation of the current and the deferred tax for 2018.
In 2018, I gave you the fact that we experienced a taxable income that year of $20,000.
The first thing we want to do with that taxable income ... We don't want to pay taxes on that
yet.
We want to check to our tax return and say, "Hey.
Do we have any loss carryforwards?"
It turns out that we do.
We're going to apply the loss carryforward that we had at the end of last year.
It was a $50,000 loss carryforward.
We don't need the whole thing.
We only apply $20,000 to 2018.
We'll have no current tax owing for this year.
However, we've used up $20,000 of our loss carryforward of the total $50,000, if you
remember, from 2017 loss carryforward.
Then, when we go do our deferred tax calculation, we're going to look at that loss carryforward
that we have of $50,000, but we used in 2018, $20,000 of it.
We now only have $30,000 remaining, so the remaining loss carryforward.
Then, you have to ask the same question you did in 2017.
Do I think I can earn taxable income of $30,000 in the next 19 years, because we're 1 year
forward?
In the next 19 years, do I think I can use $30,000?
I'm just going to stick with the same assumption we made in 2017.
I'm going to assume that 80% we can use, and 20% right now we're estimating that we can't
use.
We'll do our deferred tax calculation based on this 80%.
The 80%, we have a deferred tax.
That works out to $24,000 loss carryforward times the tax rate of 21%.
We want a deferred tax asset of $5,040.
That's the deferred tax asset we want at the end of 2018.
Our unadjusted balance is $8,400 that we set up as a deferred tax asset last year, if you
recall.
Our journal entry to record to deferred tax for this year is we're going to record an
expense of $3,360.
We're going to take that deferred tax asset account, and we want to bring it down from
a debit of $8,400, we want to bring it down to a debit of only $5,040.
We're going to credit the deferred tax asset account, and we're going to debit deferred
tax expense for $3,360.
We've got $0 current tax expense this year, and we have $3,360 of deferred tax expense
for this year.
Now, we're in 2018 with a $20,000 taxable income.
It results in no current tax needing to be recorded because we had a loss carryforward
at the end of 2017 of $50,000, which we applied to this taxable income of $20,000 and resulted
in we didn't have to pay any tax this year.
However, our loss carryforward now at the end of 2018 is a smaller number.
It's resulting in a smaller deferred tax asset.
We had to reverse out some of the deferred tax asset that we had, which resulted in a
deferred tax expense entry here.
Now, I want to show you just as a wrap-up, a summary of what the journal entries looked
like for both 2017 for taxes and 2018 tax journal entries.
In 2017, the current tax entry was a debit to income tax recoverable, or receivable,
and a credit to current tax benefit on income statement account.
$8,200 was the current tax recoverable, so that's a balance sheet account of $8,200,
and the income statement would have a favorable number of $8,200.
The deferred tax journal entry, to set up the deferred tax asset for the loss carryforward
was a debit to the deferred tax asset of $8,400, and a credit to deferred tax benefit of $8,400.
Again, you'll have an asset on your balance sheet of $8,400.
It will be a long-term asset following IFRS.
These two figures will be favorable numbers in your income statement for 2017.
Then, we moved on to 2018, and we had no current tax owing because we applied that loss carryforward
to the $20,000 of taxable income.
No current tax owing, so no journal entries required.
The deferred tax asset that you would set up here of $8,400, we had to draw it down
because we have less tax carryforward.
We want to draw down that deferred tax asset, so you'll credit the deferred tax asset to
make it smaller.
We'll draw it down by $3,360, and the other side of the entry is a debit to deferred tax
expense of $3,360.
That number will be on your income statement as an unfavorable value.
This number will offset, will be a credit to the account of $8,400.
The result will be on your balance sheet.
You'll have a $5,040 worth of long-term deferred tax asset.
That summarizes the journal entries that we created for both fiscal year 2017/2018, applying
the loss carryback and loss carryforward rules.
I hope you enjoyed this video, and found some value to this, and look forward to seeing
you again soon.
Bye for now.