Frahm Company incurred a first quarter operating loss before income tax effect of $4,000,000.This is a normal occurrence for Frahm because of seasonal fluctuations.Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year.Frahm estimates its annual income tax rate will be 30 percent.What net loss should Frahm report for the first quarter?
A)$4,000,000
B)$2,800,000
C)$700,000
D)$0

Question

Quizplus · Accepted Answer

Frahm's first quarter operating loss of $4,000,000 will be offset by income earned during the remaining quarters, as per the question. Therefore, Frahm should not report the full $4,000,000 loss. The income tax effect of the loss would be -$1,200,000 (30% of $4,000,000), resulting in a net loss of $2,800,000 ( $4,000,000 - $1,200,000). Hence, option B is the correct answer.

Frahm Company Incurred a First Quarter Operating Loss Before Income