Assume that Sharp operates in an industry for which NOL carryback is allowed. In its first three years of operations Sharp reported the following operating income (loss) amounts: 2019 $ 1,350,000 2020 (3,150,000 ) 2021 5,400,000 There were no deferred income taxes in any year. In 2020, Sharp elected to carry back its operating loss. The enacted income tax rate was 25% in 2019 and 30% thereafter. In its 2021 balance sheet, what amount should Sharp report as current income tax payable?

$1,620,000

Explanation:

Assume that Sharp operates in an industry for which NOL carryback is allowed.

In its first three years of operations Sharp reported the following operating income (loss) amounts: 2019 $ 1,350,000 2020 (3,150,000 ) 2021 5,400,000

There were no deferred income taxes in any year. In 2020, Sharp elected to carry back its operating loss.

The enacted income tax rate was 25% in 2019 and 30% thereafter.

In its 2021 balance sheet, what amount should Sharp report as current income tax payable is the applicable tax rate for 2021 applied on the income of the year: 30% x 5,400,000 = $1,620,000

current income tax payable = $1,012,500

Explanation:

year        profit/loss         taxes

2019        $1,350,000     $337,500

2020      ($3,150,000)   ($945,000)

2021       $5,400,000   $1,620,000

Since Sharp decided to carry back their NOL for 2020, they cancel out of their 2019 taxes, and $607,500 are left to carry forward for 2021. Net taxes due in 2021 after NOL carry forward = $1,620,000 - $607,500 = $1,012,500

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