Question

Fore Farms reported a pretax operating loss of $220 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 $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.

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 $245 million. No additional temporary differences originate in 2022.
  

I need help with number #3

Answer 1

Solution 1:

computation of taxable operating loss:

Particulars. Amount(in million$)

Pretax operating income or(loss) -220

Add: non deductible penalty. 4

Add:estimated loss contingency. 10

Deductible in 2022

Taxable operating income/(loss) (206)

Journal entries 2021:

Event	particulars	debit($)	credit($)
1	Deferred tax asset	54
	Income tax benifit-net operating loss		54
	(To record deferred tax assets for temporary differences and loss carried forward)

solution 2:

Income statement

particulars. Amount(million$)

operating income/(loss) before income tax. 220

Income tax benifit-net operating loss. 54

Net operating income/(loss) 166

Solution 3:

Journal entries-2022:

Event	particulars	debit($)	credit($)
1	Income tax expense(245*25%)	61.25
	Income tax payable(29*25%)		7.25
	Deferred assets		54
	(To record income tax expenses for 2022)