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 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 $ 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. 2. what is the net operating loss reported in 2016 income statement? 3. Prepare the journal entry to record income taxes in 2017 assuming pretax accounting income is $95 million. No additional temporary differences originate in 2017.

Explanation / Answer

1.

Deferred tax asset:

Journal

2.

3.

Journal

Prior Years Current
Year Future Deductible
Amounts 2014 2015 2016 Total Accounting loss (180) Non-temporary differences: Fine paid 10 Tenporary differences: Loss contingency 10 (10) Taxable loss (160) Loss carryback (100) (50) 150 Loss carryforward 10 (10) 0 (20) Enacted tax rate 40% 40% 40% 40% Tax payable (refundable) (40) (20) 0 Deferred tax asset (8)

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