In: Accounting
Fore Farms reported a pretax operating loss of $210 million for
financial reporting purposes in 2021. Contributing to the loss were
(a) a penalty of $10 million assessed by the Environmental
Protection Agency for violation of a federal law and paid in 2021
and (b) an estimated loss of $20 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.
Required:
1. Prepare the journal entry to recognize the
income tax benefit of the net operating loss in 2021.
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 $225 million. No
additional temporary differences originate in 2022.
Solution 1:
Computation of Taxable Operating Loss (2021) | |
Particulars | Amount (In million) |
Pre tax operating Income (Loss) | -$210.00 |
Add: Non deductible penalty | $10.00 |
Add: Estimated loss contingency deductible in 2022 | $20.00 |
Taxable operating income (Loss) | -$180.00 |
Journal Entries - Fore Farms (2021) | |||
Event | Particulars | Debit (In Million) | Credit (In Million) |
1 | Deferred tax assets Dr | $50.00 | |
To Income Tax Benefits - Net operating loss | $50.00 | ||
(To record deferred tax assets for temporary differences) |
Solution 2:
Income Statement - Fore Farms | |
Particulars | Amount (In Million) |
Operating Income (loss) before income tax | -$210.00 |
Income tax benefit - Net operating loss | $50.00 |
Net Operating Income (Loss) | -$160.00 |
Solution 3:
Journal Entries - Fore Farms (2022) | |||
Event | Particulars | Debit (In Million) | Credit (In Million) |
1 | Income tax expense Dr | $56.25 | |
To Income Tax payable (25*25%) | $6.25 | ||
To Deferred tax assets | $50.00 | ||
(To record income tax expense for 2022) |