Question

Fores Construction Company reported a pretax operating loss of $120 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 $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	$	65	million
2017		15	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 $60 million. No additional temporary differences originate in 2019.

Answer 1

1.

Account Titles	Debit	Credit
	$ ( millions)	$ ( millions)
Receivable : Income Tax Refund ( 26 + 6)	32
Deferred Tax Asset	12
Income Tax Benefit		44

Workings:

	Prior Years		Current Year	Future Deductible Amounts
	2016	2017	2018
Accounting Loss			(120)
Permanent Difference			10
Temporary Difference			10	(10)
Taxable Loss			(100)
Loss Carryback	65	15	80
Loss Carryforward			20	(20)
			0	(30)
Enacted Tax Rate	40%	40%	40%	40%
Tax Payable ( Refundable)	(26)	(6)		0
Deferred Tax Asset				(12)

2. Net Operating Loss: $ 76 million.

Operating Loss before Income Taxes		120
Less: Income Tax Benefit
Tax Refund	32
Future Tax Benefits	12	44
Net Operating Loss		76

3.

Account Titles	Debit	Credit
	$ ( millions)	$ ( millions)
Income Tax Expense	24
Deferred Tax Asset		12
Income Taxes Payable		12