Question

Fore Farms reported a pretax operating loss of $137 million for financial reporting purposes in 2024. Contributing to the loss were (a) a penalty of $5 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2024 and (b) an estimated loss of $12 million from accruing a loss contingency. The loss will be tax deductible when paid in 2025.

The enacted tax rate is 25%. There were no temporary differences at the beginning of the year and differences; none originating in 2024 other than those described above.
Required:
Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2024.

Answer 1

The income tax benefit for Fore Farms with a pretax operating loss of $137 million is calculated at a 25% tax rate, resulting in a benefit of $34.25 million. The journal entry debits Income Tax Benefit and credits Deferred Tax Asset by this amount.

Step-by-step explanation:

The student is asking how to prepare the journal entry to recognize the income tax benefit of a net operating loss for Fore Farms, which reported a pretax operating loss of $137 million in 2024. This loss includes a penalty of $5 million paid for an EPA violation and an estimated loss of $12 million from a loss contingency. The enacted tax rate is 25%. To calculate the income tax benefit, we multiply the total pretax operating loss of $137 million by the tax rate.

Income Tax Benefit = Pretax Operating Loss × Enacted Tax Rate = $137 million × 25% = $34.25 million.

The journal entry in 2024 would be:

• Debit: Income Tax Benefit $34.25 million
• Credit: Deferred Tax Asset $34.25 million