Question

Wynn Farms reported a net operating loss of $100,000 for financial reporting and tax purposes in 2021. The enacted tax rate is 25%. Taxable income, tax rates, and income taxes paid in Wynn’s first four years of operation were as follows:

	Taxable Income			Tax Rates			Income Taxes Paid
2017	$	60,000		15	%		$	9,000
2018		70,000		15				10,500
2019		80,000		25				20,000
2020		60,000		30				18,000

Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. NOL carrybacks are not allowed for most companies, except for property and casualty insurance companies as well as some farm-related businesses. Assume Wynn is one of those businesses.
2. Show the lower portion of the 2021 income statement that reports the income tax benefit of the net operating loss.

Answer 1

Solution 1:

Net Operating loss carryback	Amount	Rate of Tax	Tax	Recorded as
Carried back - 2017	$0.0	15%	$0.00
Carried back - 2018	$0.0	15%	$0.00
Carried back - 2019	$80,000.0	25%	$20,000.00
Carried back - 2020	$20,000.0	30%	$6,000.00
Total Carryback	$100,000.0		$26,000.00	Income tax benefit

Adjusting Journal Entries - Wynn Farm
Event	Particulars	Debit	Credit
1	Receivables - Income Tax Refund	$26,000.00
	To Income tax benefit - Net Operating Loss		$26,000.00
	(Being income tax benefit due to loss carryback recorded)

Solution 2:

Income Statement - Wynn Farm For the year ended December 31, 2021
Particulars	Amount
Operating loss before income tax	-$100,000.00
Income tax benefit:
Tax refund from loss carryback	$26,000.00
Net Income (Loss)	-$74,000.00