Fores Construction Company reported a pretax operating loss of $210 million for
ID: 2516689 • Letter: F
Question
Fores Construction Company reported a pretax operating loss of $210 million for financial reporting purposes in 2018. Contributing to the loss were (a) a penalty of $10 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2018 and (b) an estimated loss of $20 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 $90 million. No additional temporary differences originate in 2019
Explanation / Answer
Pre Tax Operating Loss -210 Add: Fine Paid 10 Add: Contingency Loss 20 Taxable Loss -180 Loss carry Back : (110+55) 165 Loss Carry Forward -15 Tax Rate 40% Tax Payable/ (Refund) 165*40% -66 Deferred Tax Asset Temporary Difference- Contingency Loss 20 Less: Opening Balance 0 Change in Balance 20 Accounts Title & Explanation Debit Credit Income Tax Refund - receivable 66 Deferred Tax Asset 20 Income Tax Benefit 86 Operating Loss before Income Tax 210 Less: Income Tax Benefit Tax Refund from Loss Carry Back 66 Future Tax Benefits 20 86 Net Operating Loss 124 Pretax Income 90 Temporary Difference- Contingency Loss -20 Loss Carry Forward -15 Taxable Income 55