Fore Farms reported a pretax operating loss of $137 million for financial reporting purposes in 2021. Contributing to the loss were (a) a penalty of $5 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $12 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

Solution:

The situation under which the operational expense of the company exceeds the sales over a specified amount of time, typically a quarter or year, is defined as the operating loss.

Accounting profits relates to the interest that a corporation holds from paying for the related operating tax expenditures.

Computation of Taxable Operating Loss (2021)

Account Title                                                                Amount (In million)

Pre-tax operating Income (Loss)                                         ($137.00)

Add: Non-deductible penalty                                                 $5.00

Add: Estimated loss contingency deductible in 2022         $12.00

Taxable operating income (Loss)                                         ($120.00)

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