Fore Farms reported a pretax operating loss of $204 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 $ 92 million 2020 $ 68 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 $232 million. No additional temporary differences originate in 2022.
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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
No | Transaction | General Journal | Debit | Credit |
---|---|---|---|---|
1 | ||||
2.) What is the net operating loss reported in 2021 income statement? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)
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3.) Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is $232 million. No additional temporary differences originate in 2022. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
No | Transaction | General Journal | Debit | Credit |
---|---|---|---|---|
1 | 1 | Income tax expense | ||
Income taxes payable | ||||
Deferred tax asset |
Solution 1:
Computation of Taxable Operating Loss (2021) | |
Particulars | Amount (In million) |
Pre tax operating Income (Loss) | -$204.00 |
Add: Non deductible penalty | $4.00 |
Add: Estimated loss contigency deductible in 2022 | $10.00 |
Taxable operating income (Loss) | -$190.00 |
Net Operating loss carryback | Amount (In million) | Rate of Tax | Tax | Recorded as |
Carried back - 2019 | $92.00 | 25% | $23.00 | |
Carried back - 2020 | $68.00 | 25% | $17.00 | |
Total Carryback | $160.00 | $40.00 | Income tax benefit | |
Deferred Tax Assets | Amount (In million) | Rate of Tax | Tax | |
Loss Carried forward | $30.00 | 25% | $7.50 | |
Estimated loss contigency deductible in 2022 | $10.00 | 25% | $2.50 | |
Total Temporary differences and deferred tax assets | $40.00 | $10.00 | Deferred tax assets |
Journal Entries - Fore Farms (2021) | |||
Event | Particulars | Debit (In Million) | Credit (In Million) |
1 | Receivables - Income Tax Refund | $40.00 | |
Deferred tax assets Dr | $10.00 | ||
To Income Tax Benefits - Net operating loss | $50.00 | ||
(To record deferred tax assets for temporary differences and loss carry forward) |
Solution 2:
Income Statement - Fore Farms | |
Particulars | Amount (In Million) |
Operating Income (loss) before income tax | -$204.00 |
Income tax benefit - Net operating loss | $50.00 |
Net Operating Income (Loss) | -$154.00 |
Solution 3:
Journal Entries - Fore Farms (2022) | |||
Event | Particulars | Debit (In Million) | Credit (In Million) |
1 | Income tax expense Dr | $58.00 | |
To Income Tax payable (192*25%) | $48.00 | ||
To Deferred tax assets | $10.00 | ||
(To record income tax expense for 2022) |
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