Question

Wynn Farms reported a net operating loss of $100,000 for financial reporting and tax purposes in...

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.

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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
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