Question

Fore Farms reported a pretax operating loss of $184 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 $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. Taxable income in Fores's two previous years of operation was as follows: 2019 2020 $ 84 million $ 60 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 $216 million. No additional temporary differences originate in 2022.

Answer 1

| Answer: O Journal Entries Date particulars Debit(million creditnilrent (1) Receivable Income tax refund Ale dr $ 38 |(84 +68) X 25%] Defferred to asset Ale dr $7 084-8 - 68-1)x250 To Encome tax Benefit $45 (184-4) *25%. Being to reasd the income tax benefit of the net operating ass En 2021) Q) Income statement Operating less before income taxes Ineome tan benefit: Benefit due to loss carry back 1$38 Benefit due to less Carry forward $45 Net income / Loss & 139 3) Journal Entry! Dace particulars Debit credit Income tax Expenste (216x 25%) Ale dr & 54 Deferred tax asset $7 f(184-84-68-4) X25%] Income tax payable (216-28) X25% Being to record income taxes in 2002) $ 47