Question

Wynn Farms reported a net operating loss of $172,000 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 $ 78,000 20 % $ 15,600

2018 88,000 20 17,600

2019 152,000 25 38,000

2020 78,000 35 27,300

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

Solution 1:

Net Operating loss carryback	Amount	Rate of Tax	Tax	Recorded as
Carried back - 2017	$0.0	20%	$0.00
Carried back - 2018	$0.0	20%	$0.00
Carried back - 2019	$152,000.0	25%	$38,000.00
Carried back - 2020	$20,000.0	35%	$7,000.00
Total Carryback	$172,000.0		$45,000.00	Income tax benefit

Adjusting Journal Entries - Wynn Farm
Event	Particulars	Debit	Credit
1	Receivables - Income Tax Refund	$45,000.00
	To Income tax benefit - Net Operating Loss		$45,000.00
	(Being income tax benefit due to loss carryback recorded)

Solution 2:

Income Statement - Wynn Farm For the year ended December 31, 2021
Particulars	Amount
Operating loss before income tax	-$172,000.00
Income tax benefit:
Tax refund from loss carryback	$45,000.00
Net Income (Loss)	-$127,000.00