Follett Company incurred a first quarter operating loss before income tax effect of $2,000,000.This is a normal occurrence for Follett because of seasonal fluctuations.Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year.Follett estimates its annual income tax rate will be 35 percent.What net loss should Follett report for the first quarter?
A)$0
B)$700,000
C)$1,300,000
D)$2,000,000

Question

Quizplus · Accepted Answer

Follett should report a net loss for the first quarter, but it should also consider the income tax effect. Using the estimated annual income tax rate of 35%, the income tax effect on the $2,000,000 operating loss would be $700,000 ($2,000,000 x 35%). Therefore, the net loss for the first quarter should be $1,300,000 ($2,000,000 - $700,000). Option C is the correct answer.

Follett Company Incurred a First Quarter Operating Loss Before Income