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 form 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

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

Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2018. Fores elects the carryback option. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Record 2018 income taxes. Note: Enter debits before credits. Event General Journal Debit Credit Record entry Clear entry View general journal

Answer 1

Solution:

1)Journal entries

Event	Account title and explanation	Debit	Credit
1	Receivable - income tax refund(105 +50)*40%	$62
	Deffred tax asset(240 -105-50-15)*40%	$28
	Income tax benefit(240-15)*40%		$90
	(To recognized the income tax benefit of the net operating loss in 2018)

2) Net operating loss reported in 2018 (240 - 90) =$150

Income statement
Operating loss before income taxes		($240)
Income tax benefit
Benefit due to loss carryback	$62
Benefit due to loss carryforward	$28	$90
Net Income / Loss		($150)

3)

Event	Account title and explanation	Debit	Credit
1)	Income tax expense($90*40%)	$36
	Deferred tax asset($70*40%)		$28$
	Income tax payable ($90-$70)*40%		$8
	(To record income taxes in 2019)