accounting 494979

Discussion Memorandum #1 Net Operating Losses   The Dam Tubing Company has been in business for approximately 15 years operating a tubing business along the Guadalupe River near a local dam.  By 2009, the business had been growing steadily was generating approximately $1,200,000 in sales and $180,000 of taxable income each year.  The pattern changed in 2010 when, due to a two year drought, the company saw its taxable income reduced and then turn into a taxable loss in 2011.  In 2012, because there was more rainfall, the company experienced something of a recovery resulting in taxable income for 2012.  Unfortunately calendar year 2013 was another record dry year and the company experienced a large taxable loss due to the severity of the drought and to incurring certain extra drought-related safety measures the company implemented in that year.  The pattern of taxable income and loss since prior to 2010 is shown below:   Year Taxable Income (Loss) Years Prior to 2010  $180,000 a year 2010  $  90,000 2011 ($150,000)[1] 2012  $100,000 2013 ($294,000)   As company controller, you have already explained to Mr. Rite, the company’s owner and CEO, that the company will likely choose to carryback part of the 2013 loss to prior years to obtain a quick recovery of taxes previously paid the IRS.  Besides any receivable from the IRS that may be recorded, Mr. Rite would like see no allowance recorded on any deferred tax asset that may be recognized related to any unused 2013 net operating loss (NOL) that is carried forward.  He wants to see an improvement in the company’s financial position in preparation for borrowing funds to do additional maintenance on the tubing facilities due to damage caused by the rains in 2012 followed by drought in 2013.  Mr. Rite has informed you that in his opinion it is not only probable but highly likely that the company will return to profitability soon allowing the company to fully use the NOL carryforward, especially since the…