Final answer:
In 2024, the journal entry to recognize the income tax benefit of the net operating loss is a debit to Income Tax Benefit and a credit to Deferred Tax Asset. The net loss reported in the 2024 income statement is $120 million. In 2025, the journal entry to record income taxes is a debit to Income Tax Expense and a credit to Income Tax Payable.
Step-by-step explanation:
First, let's prepare the journal entry to recognize the income tax benefit of the net operating loss in 2024. The tax benefit is calculated by multiplying the pretax operating loss of $150 million by the enacted tax rate of 25%. The journal entry would be:
Debit: Income Tax Benefit $37.5 million
Credit: Deferred Tax Asset $37.5 million
To calculate the net loss reported in the 2024 income statement, we need to subtract the penalty of $10 million and the loss contingency of $20 million from the pretax operating loss of $150 million. The net loss reported in the income statement would be $120 million.
In 2025, assuming a pretax accounting income of $155 million, the income tax expense can be calculated by multiplying the pretax accounting income by the enacted tax rate of 25%. The journal entry would be:
Debit: Income Tax Expense $38.75 million
Credit: Income Tax Payable $38.75 million