AirParts Corporation reported a net operating loss of $12 million for financial reporting and tax purposes. Taxable income last year and the previous year, respectively, was $12 million and $7 million. The enacted tax rate each year is 30%.

Required:

a. Prepare the journal entry to recognize the income tax benefit of the net operating loss. AirParts elects the carryback option.

Debit: Income tax refund receivable with $3,600,000

Credit: Income tax benefit of operating loss with $3,600,000

Explanation:

Step 1: Calculation of income tax benefit o f the net operating loss

Income tax benefit = Net operating loss * Tax rate

= $12,000,000 * 30%

Income tax benefit = $3,600,000

Step 2: Journal entry to recognize the income tax benefit of the net operating loss

Since the taxable income last of $12 million will also produce tax payable of $3,600,000 at 30% tax rate, AirParts Corporation and irParts elects the carryback option, the journal entry will be as follows:

DR ($) CR ($)

Income tax refund receivable 3,600,000

Income tax benefit of operating loss 3,600,000

Being the income tax benefit of the net operating loss