Loss carryback is typically recorded with which journal entry?

Loss carryback is typically recorded with which journal entry?

• A. Debit Current Income Tax Expense; Credit Income Taxes Payable
• B. Debit Income Taxes Receivable; Credit Current Income Tax Expense
• C. Debit Deferred Tax Asset; Credit Deferred Tax Expense
• D. Debit Tax Refund Receivable; Credit Income Tax Expense

Answer: (B)

When a loss carryback is allowed, you expect a refund of taxes paid in a prior year. That creates a current asset (a receivable) for the amount of the refund and reduces the current year's income tax expense, since part of the tax benefit is being recovered. The typical journal entry is to debit an income taxes receivable (tax refund receivable) and credit current income tax expense. This records the asset you expect to receive and lowers the current tax expense on the income statement. When the refund actually arrives, you would then debit cash and credit the income taxes receivable to settle the asset. Why this fits: it matches the economic effect of a loss carryback—an expected cash refund and a reduction in the current tax expense—rather than creating a payable or adjusting deferred tax accounts.

When a loss carryback is allowed, you expect a refund of taxes paid in a prior year. That creates a current asset (a receivable) for the amount of the refund and reduces the current year's income tax expense, since part of the tax benefit is being recovered.

The typical journal entry is to debit an income taxes receivable (tax refund receivable) and credit current income tax expense. This records the asset you expect to receive and lowers the current tax expense on the income statement.

When the refund actually arrives, you would then debit cash and credit the income taxes receivable to settle the asset.

Why this fits: it matches the economic effect of a loss carryback—an expected cash refund and a reduction in the current tax expense—rather than creating a payable or adjusting deferred tax accounts.