Final answer:
To prepare the journal entry for Baginski Steel Corporation's 2025 tax expense, the company would recognize a $50,000 tax expense and a $50,000 deferred tax asset, offset by the loss carryforward from the previous year, resulting in an actual tax expense of zero due to the carryforward benefit.
Step-by-step explanation:
The student's question relates to accounting for income taxes in a situation where Baginski Steel Corporation had a net operating loss in its first year and reported income in the following year. Considering the enacted tax rate of 25%, the journal entry to recognize Baginski's 2025 tax expense would involve calculating the current year's tax expense and considering the benefit of the net operating loss carryforward from the previous year.
Firstly, we calculate the tax expense for 2025, which would be 25% of the $200,000 income, resulting in a $50,000 tax expense. Since Baginski had a net operating loss of $360,000 in 2024, this loss can be carried forward to offset taxable income in 2025. The full benefit of the loss cannot be realized in 2025 since the income ($200,000) is less than the loss ($360,000). However, the carryforward will reduce the 2025 taxable income to $0, and the remainder ($160,000) can potentially be carried further to subsequent years. Therefore, Baginski would recognize a tax benefit due to the loss carryforward, which would be the lower of the loss carryforward ($360,000) or the taxable income ($200,000), both multiplied by the tax rate (25%).
The journal entry in 2025 would be:
- Debit Tax Expense: $50,000
- Credit Deferred Tax Asset: $50,000
However, since the taxable income is completely offset by the loss carryforward, the company would not pay any actual taxes for the year 2025, and the tax expense would be effectively zero.