Question

During its first year of operations, Alcoa Corporation reported a net operating loss of $800,000 for financial reporting and tax purposes. The enacted tax rate is 25%. Which of the following is true?

a. Deferred tax assets are increased by $800,000 b. Deferred tax liabilities are increased by $800,000 c. Net income is -$600,000 d. Income tax expense is debited by $200,000 e. Net income is -$800,000

Answer 1

Answer:

c. Net income is -$600,000

Explanation:

Net Operating loss	-$800,000
Income tax [$800,000 x 25%]	$200,000
Net income	-$600,000

Therefore Option c is correct.

Entry for tax on net operating loss could be:

Account title and explanation	Debit	Credit
Deferred tax liability [$800,000 x 25%]	$200,000
Income tax benefit-Operating loss		$200,000

Therefore, Option a, b & d is incorrect.

Thus, Option c is correct and remaining options are incorrect.