Fores Construction Company reported a pretax operating loss of $135 million for

Question

Fores Construction Company reported a pretax operating loss of $135 million for financial reporting purposes in 2018. Contributing to the loss were (a) a penalty of $5 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2018 and (b) an estimated loss of $10 million from accruing a loss contingency. The loss will be tax deductible when paid in 2019.

The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2018 other than those described above. Taxable income in Fores’s two previous years of operation was as follows:

Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2018. Fores elects the carryback option.
2. What is the net operating loss reported in 2018 income statement?
3. Prepare the journal entry to record income taxes in 2019 assuming pretax accounting income is $60 million. No additional temporary differences originate in 2019.

2016 $ 75 million 2017 30 million

Explanation / Answer

1. In the books of Fores Construction Company:

Penalty of $ 5 million is a permanent difference, and hence not considered for deferred tax computations.

2. Net Operating Loss to be reported in the 2018 income statement: $ 83 million

3. In the books of Fores Construction Company:

Event Account Titles Debit Credit 2018 $ $ 1. Income Tax Refund Receivable $ ( 75 + 30 ) million x 40% 42 Deferred Tax Asset $ [( 135 - 5*) - ( 75 + 30) ] million x 40 % 10 Income Tax Benefit 52

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