Question

Fores Construction Company reported a pretax operating loss of $100 million for financial reporting purposes in 2018. Contributing to the loss were (a) a penalty of $5 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2018 and (b) an estimated loss of $10 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: 2016 $ 60 million 2017 10 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 $55 million. No additional temporary differences originate in 2019.

Answer 1

Event	Accounts Title	Dr	Cr
1	Receivable-Income Tax Refund	$28
	Deferred Tax Assets	$10
	Income Tax Benfit (100-5)million*40%		38
	Receivable-Income Tax Refund
	Taxable Income	Tax rate	Tax
2016	60 miilion	40%	24
2017	$10 million	40%	4
	Receivable-Income Tax Refund		28
ans 2	Net operating loss reported	62	million
	Pre tax operating loss-Income atx Benefit
	100-38
ans 3	Income Tax expense	22
	Deferred Tax Assets		12
	Income Tax payable		10
	working
	Income tax expense 55*40%	22
	Less: Deferred Tax asset	12
	Income Tax payable	10
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