Question

Fore Farms reported a pretax operating loss of $150 million for financial reporting purposes in 2024. Contributing to the loss were (a) a penalty of $10 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2024 and (b) an estimated loss of $20 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 none originating in 2024 other than those described above: Required: a) Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2024. b) What is the net loss reported in 2024 income statement? c) Prepare the journal entry to record income taxes in 2025 assuming pretax accounting income is $155 million. No additional temporary differences originate in 2025.

Answer 1

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

Answer 2

To recognize the income tax benefit of the net operating loss in 2024, a journal entry needs to be prepared. The net loss reported in the 2024 income statement would be $112.5 million. The journal entry to record income taxes in 2025 would involve income tax expense and deferred tax assets.

Step-by-step explanation:

To recognize the income tax benefit of the net operating loss in 2024, a journal entry needs to be prepared. The tax benefit is calculated by multiplying the pretax operating loss by the enacted tax rate. In this case, the tax benefit would be $37.5 million ($150 million x 25%). Therefore, the journal entry would be:

Income Tax Benefit (DR) $37.5 million
Deferred Tax Asset (CR) $37.5 million

The net loss reported in the 2024 income statement would be the pretax operating loss of $150 million minus the income tax benefit of $37.5 million. Therefore, the net loss would be $112.5 million.

In 2025, assuming the pretax accounting income is $155 million, the journal entry to record income taxes would be:

Income Tax Expense (DR) $38.75 million
Deferred Tax Asset (CR) $37.5 million
Income Taxes Payable (CR) $1.25 million