Fores Construction Company reported a pretax operating loss of $260 million for
ID: 341891 • Letter: F
Question
Fores Construction Company reported a pretax operating loss of $260 million for financial reporting purposes in 2018. 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 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 $120 million. No additional temporary differences originate in 2019.
Explanation / Answer
Requirement 1
($ in millions)
Current Future
Prior Years Year Deductible
2016 2017 2018 Amounts
[total]
Accounting loss (260)
Permanent difference:
Fine paid 15
Temporary differences:
Loss contingency 20 (20)
Taxable loss (225)
Loss carryback (135) (80) 215
Loss carryforward 10 (10)
0 (30)
Enacted tax rate 40% 40% 40% 40%
Tax payable (refundable) (54) (32) 0
Deferred tax asset (12)
¯
Deferred tax asset:
Ending balance (balance currently needed) $ 12
Less: beginning balance (0)
Change needed to achieve desired balance $12
Journal entry at the end of 2018
Receivable – income tax refund ($54 + 32) 86
Deferred tax asset (determined above) 12
Income tax benefit (to balance) 98
Requirement 2
($ in millions)
Operating loss before income taxes $260
Less: Income tax benefit:
Tax refund from loss carryback $86
Future tax benefits 12 98
Net operating loss $ 162
Requirement 3
($ in millions)
Current Future
Year Deductible
2019 Amounts
Pretax accounting income 120
Temporary differences:
Loss contingency (20)
Operating loss carryforward (10)
Taxable income (income tax return) 90 0
Enacted tax rate 40% 40%
Tax payable 36
Deferred tax asset 0
¯
Deferred tax asset:
Ending balance (balance currently needed) $ 0
Less: beginning balance (12)
Change needed to achieve desired balance $(12)
Journal entry at the end of 2019
Income tax expense (to balance) 48
Deferred tax asset (determined above) 12
Income tax payable (determined above) 36