Question

Fore Farms reported a pretax operating loss of $150 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $6 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $10 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.

Question: Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is $175 million. No additional temporary differences originate in 2022.

Answer 1

Solution:

Computation of Taxable Operating Loss (2021)
Particulars	Amount (In million)
Pre tax operating Income (Loss)	-$150.00
Add: Non deductible penalty	$6.00
Add: Estimated loss contigency deductible in 2022	$10.00
Taxable operating income (Loss)	-$134.00

Journal Entries - Fore Farms (2022)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr (175*25%)	$43.75
	To Income Tax payable [(175-134-10)*25%]		$7.75
	To Deferred tax assets		$36.00
	(To record income tax expense for 2022)