Fores Construction Company reported a pretax operating loss of $135 million for financial reporting purposes in 2006. Contributing to the loss were (a) a penalty of $5 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2006 and (b) an estimated loss of $10 million from accruing a loss contingency. The loss will be tax deductible when paid in 2007.
The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2006 other than those described above. Taxable income in Fores” two year previous years of operations was as follows:
2004 $75 million
2005 $30 million
Prepare the journal entry to recognize the income tax benefit of the operating loss for 2006. Fores elects the carryback option.
Show the lower portion of the 2006 income statement that reports the income tax benefit of the operating loss
Solution
Requirement 1
($ in millions)
Current Future
Prior Years Year Deductible
2004 2005 2006 Amounts
[total]
Accounting loss (135)
Non-temporary difference:
Fine paid 5
Temporary differences:
Loss contingency 10 (10)
Taxable loss (120)
Loss carryback (75) (30) 105
Loss carryforward 15 (15)
0 (25)
Enacted tax rate 40% 40% 40% 40%
Tax payable (refundable) (30) (12) 0
Deferred tax asset (10)
¯
Deferred tax asset:
Ending balance $ 10
Less: beginning balance (0)
Change in balance $10
Journal entry at the end of 2006
Receivable – income tax refund ($30 + 12) 42
Deferred tax asset (determined above) 10
Income tax benefit (to balance) 52
Requirement 2
($ in millions)
Operating loss before income taxes $135
Less: Income tax benefit:
Tax refund from loss carryback $42
Future tax benefits 10 52
Net operating loss $ 83
