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 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: 2016 2017 $135 million 80 million 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.

Answer 1

Answer
Answer 1			Prior Year		Current	Future Deductible Amount
			2016	2017	2018
	Loss as per Books				$      -260
	Permanent Diff-Fine Paid				$         15
	Temporary Diff-Contingency Loss				$         20	$                                      -20
	Taxable				$      -225
	Loss from prior Years		$           -135	$                                      -80	$       215
	Loss Carryforward				$         10	$                                      -10
			$           -135	$                                      -80	$          -	$                                      -30
	Tax Rate		40%	40%	40%	40%
	Tax Payable/(Refundable)		$              -54	$                                      -32	$          -
	Deferred Tax Asset					$                                      -12
	Deferred Tax, Ending Balance	$         12
	Less: Beginning Balance	$          -
	To be recorded	$        -12
	Journal Entry for 2018
	Income Tax Refund	$         86
	Deferred Tax Asset	$         12
	Income Tax Benefit		$               98

Answer 2	Operating Loss before Tax		$           -260
	Income Tax benefit:
	Tax Refund	$         86
	Future Tax benefits	$         12	$               98
	Net Loss		$           -162

Answer 3
			Current Year
			2019
	Pretax Accounting Income		$             120
	Temporary Difference:
	Contingency Loss	$        -20
	Loss Carryforward	$        -10	$              -30
	Taxable Income		$               90
	Enacted Tax Rate		40%
	Tax Payable		$               36
	Deferred Tax, Ending Balance	$          -
	Less: Beginning Balance	$        -10
	To be recorded	$        -10
	Journal Entry for 2019
	Income Tax Expense	$         46
	Deferred Tax Asset		$               10
	Income Tax Payable		$               36

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