During 2016, its first year of operations, Baginski Steel Corporation reported a net operating loss of $375,000 for financial reporting and tax purposes. The enacted tax rate is 40%. Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss. Assume the weight of available evidence suggests future taxable income sufficient to benefit from future deductible amounts from the net operating loss carryforward.
2. Show the lower portion of the 2016 income statement that reports the income tax benefit of the net operating loss.

1. Debit Deferred Tax Liability for $150,000; and Credit Income Tax Benefit -Operating Loss for $150,000.

2. See part 2 below for how it is shown.

Explanation:

1. Prepare the journal entry to recognize the income tax benefit of the net operating loss.

Income tax benefit = Net operating loss * Tax rate = $375,000 * 40% = $150,000

The journal entry will look as follows:

Particulars                                                 Debit ($)         Credit ($)    

Deferred Tax Liability                               150,000

Income Tax Benefit - Operating Loss                            150,000

(To record the income tax benefit)                                                      

2. Show the lower portion of the 2016 income statement that reports the income tax benefit of the net operating loss.

This can be shown as follows:

Baginski Steel Corporation

Income Statement

For the Year Ended 2016

Details                                                 $              

Net operating loss                       (375,000)

Income tax benefit                      150,000  

Net loss                                      (225,000)  

answer(d) all of the choices are correct;