Question

Fore Farms reported a pretax operating loss of $120 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $4 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $10 million from accruing a loss contingency. The loss will be tax deductible when paid in 2022. The enacted tax rate is 25%. There were no temporary differences at the beginning of the year and none originating in 2021 other than those described above. Taxable income in Fores's two previous years of operation was as follows: 2019 2020 $60 million $36 million Required: 1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2021. Assume Fore will carry back its NOL to prior years. 2. What is the net operating loss reported in 2021 income statement? 3. Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is $168 million. No additional temporary differences originate in 2022.

Answer 1

Hi

Let me know in case you face any issue:

Solution: Naming Convention and format is is not available, it can be slightly different per question format: Ignore the explanation line in blue while putting answer in question format: Jounal entries 1) Event Credit Account title and explaination Debit Receivable-Income tax refund (60+36)*25% $ 24 Deferred tax asset (120-60-36-4)*25% 5 Income Tax Benefit (120-4)*25% (To recognize the income tax benefit of the net operating loss in 2021) $ 29 2) Net Operating loss reported in 2021 (120-29) = Ś 91 - 120.0 Income Statement - 2018 Operating loss before income taxes Income tax benefit: Benefit due to loss carryback Benefit Due to Loss Carryforward Net Income / -Loss $ $ 24.0 5.0 $ $ 29.0 -91.0 3) Event Credit Debit 42 $ Account title and explaination Income Tax Expense (168*25%) Deferred tax asset (20*25%) Income Tax Payable (168-20)*25% (To record income taxes in 2022)