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:

2016	$	135	million
2017		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
Journal Entry
Date	Account title & explanation	Debit (Million)	Credit (Million)
2018	Receivable – income tax refund	$              86
	To,Deferred tax asset	$              12
	To, Income tax benefit		$              98
	( To record income tax )
2)	Operating loss reported in 2018 income statement
	Operating loss before income taxes	$            260
	Less : Income tax benefit	$              98
	Net Operating loss	$            162
Date	Account title & explanation	Debit (Million)	Credit (Million)
2019	Income tax expenses	$              52
	Deferred tax asset		$              12
	To, Income tax payable		$              40
	( To record income taxes)