Prepare the journal entry to recognize the income tax

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Reference no: EM131003548

Fores Construction Company reported a pretax operating loss of $135 million for financial reporting purposes in 2011. 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 2011 and 

(b) An estimated loss of $10 million from accruing a loss contingency. The loss will be tax deductible when paid in 2012.

The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2011 other than those described above. Taxable income in Fores's two previous years of operation was as follows:

Required:

1. Prepare the journal entry to recognize the income tax benefit of the operating loss in 2011. Fores elects the carry back option.

2. Show the lower portion of the 2011 income statement that reports the income tax benefit of the operating loss.

3. Prepare the journal entry to record income taxes in 2012 assuming pretax accounting income is $60 million. No additional temporary differences originate in 2012.

Reference no: EM131003548

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