Fores Construction Company reported a pretax operating loss of $250 million for
ID: 2427522 • Letter: F
Question
Fores Construction Company reported a pretax operating loss of $250 million for financial reporting purposes in 2016. Contributing to the loss were (a) a penalty of $15 million 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 paid 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- $130 million
2015- 75 million
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 (i.e., 10,000,000 should be entered as 10).)
2. What is the net operating loss reported in 2016 income statement (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
3. Prepare the journal entry to record income taxes in 2017 assuming pretax accounting income is $115 million. No additional temporary differences originate in 2017.
Required:Explanation / Answer
Operating Loss 250 Less Loss accruing from contingency 10 Net Operating loss for Tax benefit 240 Tax @ 40% 96 Net Loss 144 Journal Entry for Income tax Credit Income Tax Credit Dr 96 To Profit & Loss A/c Cr 96 For 2017 Profit for the year 115 Less Taxes for the year 46 Income Tax credit utilised 46 0 Net Profit 115 Income Tax Credit 50 (Asset in Balance Sheet in 2017)