Question

Fore Farms reported a pretax operating loss of $212 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 $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. Taxable income in Fores's two previous years of operation was as follows: 2019 2020 S 96 million 22 Billion 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 $240 million. No additional temporary differences originate in 2022 Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 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. (If no entry is required for a transaction event, select "No journal entry required in the first account field. Enter your answers in millions (Le 10,000,000 should be entered as 101.) Vww transaction list Journal entry worksheet Record 2021 Income taxes Not Enter deb e re credits Transaction - Debit Credit

Answer 1

Solution 1:

Computation of Taxable Operating Loss (2021)
Particulars	Amount (In million)
Pre-tax operating Income (Loss)	-$212.00
Add: Non-deductible penalty	$4.00
Add: Estimated loss of contigency deductible in 2022	$30.00
Taxable operating income (Loss)	-$178.00

Journal Entries - Fore Farms (2021)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Deferred tax assets Dr ($96*25%)	$24.00
	To Income Tax Benefits - Net operating loss		$24.00
	(To record deferred tax assets for temporary differences and loss carry forward)

Solution 2:

net operating loss reported in 2021 income statement = Pre tax loss + Income tax benefit

= -$212 + $24 = -$188

Solution 3:

Journal Entries - Fore Farms (2022)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$42.00
	To Income Tax payable (72*25%)		$18.00
	To Deferred tax assets		$24.00
	(To record income tax expense for 2022)