Question

Problem 16-10 (Algo) Net operating loss carryforward; multiple differences [LO16-3, 16-5, 16-7]

Fore Farms reported a pretax operating loss of $200 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $8 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $30 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 $215 million. No additional temporary differences originate in 2022.

Answer 1

1.

Computation of Taxable Operating Loss (2021)
Particulars	Amount (In million)
Pre tax operating Income (Loss)	-$200.00
Add: Non deductible penalty	$8.00
Add: Estimated loss contigency deductible in 2022	$30.00
Taxable operating income (Loss)	-$162.00

Event	Particulars	Debit (In Million)	Credit (In Million)
1	Deferred tax assets Dr (162+30)*25%	$48.00
	To Income Tax Benefits - Net operating loss		$48.00
	(To record deferred tax assets for temporary differences and loss carry forward)

2.

Income Statement - Fore Farms
Particulars	Amount (In Million)
Operating Income (loss) before income tax	-$200.00
Income tax benefit - Net operating loss	$48.00
Net Operating Income (Loss)	-$152.00

3.

Journal Entries - Fore Farms (2022)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr ($215*25%)	$53.75
	To Income Tax payable		$5.75
	To Deferred tax assets		$48.00
	(To record income tax expense for 2022)