Reference no: EM132891645

Problem - NOLS Sophie's Orchard reported a pretax operating loss of $250,000 for financial reporting purposes in 2021. Contributing to the loss were (a) EPA penalties of $20,000 assessed by the Environmental Protection Agency for violation of a federal law and paid in 2021 and (b) an estimated loss of $75,000 from accruing a loss contingency. The loss will be tax deductible when paid in 2022. The enacted tax rate is 21%. 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. Show the lower portion of the 2021 income statement that reports the income tax benefit of the net operating loss.

3. Prepare the journal entry to record income taxes in 2022 assuming pretax accounting income is $310,000. No additional temporary differences originate in 2022.