JR Company Incurred a Loss in 2011,due in Part to a Fire

question 64

Multiple Choice

JR Company incurred a loss in 2011,due in part to a fire at one of its plants.The deferred benefit of a loss carry forward was not recognized in the year as the probability of realization was less than 50%.In 2012,JR Company incurred a small loss,but due to large contracts upcoming,it was determined that the probability of realization was greater than 50%.The tax rate for 2011 was 40% and 2012 45%.JR Company should:

• A) Record the deferred income tax benefit for 2012 only.
• B) Record the deferred income tax benefit for both years using the 40% rate.
• C) Record the deferred income tax benefit for both years using the 45% rate.
• D) Record the deferred income tax benefit for 2011 only.

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Definitions:

Pretax Accounting Income

The income an organization has earned before any taxes have been deducted, used to calculate taxable income after adjusting for any differences between accounting and tax regulations.

Enacted Tax Rate

The tax rate established by law that is applied to income or transactions.

Income Tax Expense

The total amount of income tax a company expects to pay to tax authorities relative to its taxable income.

Deferred Tax Asset

A financial item on a company's balance sheet representing taxes paid or carried forward that can be used to offset future tax liabilities.