Question

Wynn Farms reported a net operating loss of $144,000 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	$	71,000		20	%		$	14,200
2018		81,000		20				16,200
2019		124,000		25				31,000
2020		71,000		40				28,400

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

a) Journal Entry: -

Date	Particulars	L/f	Debit	Credit
31/12/2021	Deffered Tax Account Dr.		36,000
	To Income Tax Expense A/c			36,000
	(Being Deffered tax asset created whcih will be carried forward for setting off paymnets against future income tax liabilities)
31/12/2021	Income Tax Expense A/c Dr.		36,000
	To Profit & Loss A/c			36,000
	(Being income tax benefit on net operating losses to be carried forward created)

Notes: -

1. It is assumed that accounting period ends on 31/12/2021.

2. Deffered Tax asset a/c will be created and kept as an asset for paying off future income tax liabilities. Amount of deffered tax asset to be created is calculated as follows: -

= $1,44,000 x 25%

=$36,000

3. Deffered tax asset is nothing but an asset a/c which means an amount of income tax paid today whose credit can be availed at a future date.

b) Lower portion of P&L Statement is depicted as follows:-

P&L A/c
As on year ended 31/12/2021
Dr.	Cr.
Particulars	Amount	Particulars	Amount
To Net operating loss b/d	1,44,000	By Tax Expense A/c	36,000
		By Net Loss t/f to Reseves & Surplus	1,08,000
	1,44,000		1,44,000

Deffered Tax Asset A/c is created by debiting this account and crediting Tax Expense A/c. Tax expense A/c got transferred to P&L A/c on credit side i.e. depicting benefits on NOL incurred. This DTA will be adjusted with future tax liabilities.