• Chairs-R-Us Incorporated reported a net capital loss of $25,000 in year 4. It reported net capital gains of $10,000 in year 3 (before any capital loss carryback) and $20,000 of net capital gains in year 5 (before my capital loss carryovers). Chairs-R-Us Incorporated did not report any net capital gains or losses in years 1 or 2. What is the amount and nature of the book-tax difference in year 5 related to the net capital loss arryover? • Multiple Choice $15,000 favorable $20,000 favorable $25,000 favorable None of the choices are correct.
Question
• Chairs-R-Us Incorporated reported a net capital loss of 10,000 in year 3 (before any capital loss carryback) and 15,000 favorable 25,000 favorable None of the choices are correct.
Solution
The amount and nature of the book-tax difference in year 5 related to the net capital loss carryover would be $5,000 favorable. Here's how:
In year 4, Chairs-R-Us Incorporated had a net capital loss of $25,000. This loss can be carried back to year 3 and carried forward to year 5 to offset the net capital gains in those years.
In year 3, the company had net capital gains of 15,000 (10,000) to be carried forward to year 5.
In year 5, the company had net capital gains of 15,000 from year 4 can be carried forward to offset this gain, leaving a net capital gain of 20,000 - $15,000) in year 5.
Therefore, the book-tax difference in year 5 related to the net capital loss carryover is $5,000 favorable. However, this option is not provided in the multiple choices. So, the correct answer would be "None of the choices are correct."
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