During 2021, its first year of operations, Baginski Steel Corporation reported a net operating loss of $388,000 for financial reporting and tax purposes. The enacted tax rate is 25%. Required:

1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. Assume the weight of available evidence suggests that future taxable income will be sufficient to benefit from future deductible amounts arising from the net operating loss carryforward.
2. Show the lower portion of the 2021 income statement that reports the income tax benefit of the net operating loss.

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andromache andromache · Answer 1 · 2020-02-23T07:24:32+01:00

Explanation:

The journal entry is as follows:

1. Deferred tax assets A/c Dr

To Income tax benefit - Operating loss A/c

(Being the income tax benefit is recorded)

The computation is shown below:

= Net operating loss × enacted tax rate

= $388,000 × 25%

= $97,000

2. Now the lower portion of the 2021 income statement is presented below:

Net operating loss before income tax $388,000

Less: Income tax benefit - Operating loss -$97,000

Net loss $291,000