Question

Fore Farms reported a pretax operating loss of $210 million for financial reporting purposes in 2021. 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 2021 and (b) an estimated loss of $20 million from accruing a loss contingency. The loss will be tax deductible when paid in 2022. The enacted tax rate is 25%. There were no temporary differences at the beginning of the year and none originating in 2021 other than those described above. Required: 1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2021. 2. What is the net operating loss reported in 2021 income statement

Answer 1

Answer:

Fore Farms

1. Journal Entry

Debit Net operating loss $180 million

Credit Loss Carryforward Relief $180 million

To record the income tax benefit of the net operating loss.

2. The net operating loss reported in 2021 income statement is $180 million.

Explanation:

a) Data and Calculations:

Enacted tax rate = 25%

2021 Reported pretax operating loss = $210 million

Less:

Penalty for EPA violation =                          10 million

Loss contingency accrued

(temporary difference) =                            20 million

Net pretax operating loss =                    $180 million

b) The net operating loss (NOL) suffered by Fore Farms, after adjusting non-allowable penalty for EPA violation and temporary differences, will be used to offset the company's tax payments in subsequent tax periods.  This is an Internal Revenue Service (IRS) tax provision called a "loss carryforward."  It allows some tax relief to Fore Farms for losing money in 2021.