Question

Fores Construction Company reported a pretax operating loss of $240 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:

2016	$	105	million
2017		50	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 $90 million. No additional temporary differences originate in 2019.

Answer 1

Ans
The penalty of $15 million is a permanent difference as it is disallowed
The accrued loss of $20 million is a timing difference as same will be allowed in 2018.

1)
Income Tax refund receivable = 40% of (105 + 50)million = 40% of 155 million = $62 million
Deferred tax Asset= 40% of (Loss c/f + Timing difference) = 40% of (50 + 20) million = $28 million   

Journal Entry-

Dr Income tax refund receivable $62 million
Dr Deferred Tax Asset $28 million
Cr Income Tax Benefit $90 million

Working Note-

Particulars	Amount
Loss as per accounts	($240 million)
Add: Penalty Disallowed	$15 million
Add: Accrues Loss Disallowed	$20 million
Taxable Losses	($205 million)
Add: Loss Carryback (105 + 50)	$155 million
Loss Carryforward	($50 million)

2)

Particulars	Amount
Operating Losses before taxes	($240 million)
Add: Income tax Benefits	$90 million
Operating Losses after taxes	($150 million)

3)

2019-

Particulars	Amount
Accounting Income	$90 million
Less: Accrual loss disallowed in 2018	($20 million)
Less: Loss carryforward from 2018	($50 million)
Taxable Income	$20 million

Tax= 40% of $20 million = $8 million

Journal Entry

Dr. Tax expense $36 million
Cr. Deferred Tax Asset $28 million
Cr. Tax Payable $8 million