Question

Fores Construction Company reported a pretax operating loss of $220 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 $ 115 million 2017 60 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 $95 million. No additional temporary differences originate in 2019.

Answer 1

Solution 1:

Computation of Taxable Operating Loss (2018)
Particulars	Amount (In million)
Pre tax operating Income (Loss)	-$220.00
Add: Non deductible penalty	$15.00
Add: Estimated loss contigency deductible in 2019	$20.00
Taxable operating income (Loss)	-$185.00

Net Operating loss carryback	Amount (In million)	Rate of Tax	Tax	Recorded as
Carried back - 2016	$115.00	40%	$46.00
Carried back - 2017	$60.00	40%	$24.00
Total Carryback	$175.00		$70.00	Income tax benefit

Deferred Tax Assets	Amount (In million)	Rate of Tax	Tax
Loss Carried forward	$10.00	40%	$4.00
Estimated loss contigency deductible in 2019	$20.00	40%	$8.00
Total Temporary differences and deferred tax assets	$30.00		$12.00	Deferred tax assets

Adjusting Journal Entries - Fores Construction Company (2018)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Receivables - Income Tax Refund	$70.00
	To Income tax benefit - Net Operating Loss		$70.00
	(Being income tax benefit due to loss carryback recorded)
2	Deferred Tax Assets Dr	$12.00
	To Income tax benefit - Deferred Tax Assets		$12.00
	(Being deferred tax assets recorded for loss carry forward and temporary differences)

Solution 2:

Income Statement - Fores Construction Company
Particulars	Amount (In Million)
Operating Income (loss) before income tax	-$220.00
Income tax benefit - Net operating loss	$70.00
Income tax benefit - Deferred Tax Assets	$12.00
Net Operating Income (Loss)	-$138.00

Solution 3:

Adjusting Journal Entries - Fores Construction Company (2019)
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income Tax Expense Dr ($95*40%)	$38.00
	To Income tax Payable ($65*40%)		$26.00
	To Deferred Tax Assets		$12.00
	(Being income tax expense recorded and DTA reversed)