Fores Construction Company reported a pretax operating loss of $180 million for

Question

Fores Construction Company reported a pretax operating loss of $180 million for financial reporting purposes In 2016. Contributing to the loss were (a) a penalty of $10 milllon assessed by the Environmental Protection Agency for violation of a federal law and paid In 2016 and (b) an estimated loss of 10 million from accruing a loss contingency. The loss will be tax deductible when pald In 2017 The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating In 2016 other than those described above. Taxable Income in Fores's two previous years of operation was as follows: 2014 $100 million 2015 50 million Required 1. Prepare the Journal entry to recognize the Income tax benefit of the net operating loss In 2016. Fores elects the carryback option.(If no entry is required for a transaction/event, select "No Journal entry required" In the first account field. Enter your answers In millions (1.e., 10,000,000 should be entered as 10).)

Explanation / Answer

Part 1

Receivable =(100*40%)+(50*40%)=40+20=60

Deferred tax benefit = contingency loss +(accounting loss-penalty-contingency loss - (taxable income of two previous years) =10+(180-10-10-150)=20

Part 2

Net operating loss = 100 million (accounting loss-receivable-deferred tax asset) =(180-60-20)=100

Part 3

Event general journal debit credit 1 receivable - income tax refund 60 Deferred tax asset 20 Income tax benefit (60+20) 80

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