Question

Hammaker Corp. began operations in 2016 and reported taxable net income of $10 million and $4 million in 2016 and 2017, respectively. In 2018, Hammaker reports a net operating loss (NOL) of $16 million, and elects to carry back that NOL to the extent possible. The tax rate for the years 2016 through 2018 is 35%, but the enacted tax rate for 2019 and later years will be 40%. As part of year-end adjusting entries, what total tax benefit will Hammaker record as a result of the 2018 NOL?
(A) $5,700,000
(B) $4,900,000
(C) $6,400,000
(D) $5,600,000

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Taxable net income in 2016 = $10 million

Taxable net income in 2017 = $4 million

In 2018,

Net operating loss (NOL) = $16 million

Tax rate for the years 2016 through 2018 = 35%

Enacted tax rate for 2019 and later years = 40%

Total tax benefit as a result of the 2018 NOL:

= (sum of Taxable net income in 2016 and 2017) × tax rate + (16,000,000 - 14,000,000 × tax rate)

= (10,000,000 + 4,000,000) × 35% + (2,000,000 × 40%)

= $5,700,000