Refer to the information for
Riley Inc. in E18-22.
In E Riley Inc. reports the
following pre-tax incomes (losses) for both financial reporting purposes and
tax purposes:
Year Accounting Income
(Loss) Tax Rate
2009
$120,000
34%
2010
90,000
34%
2011
(280,000) 38%
2012
220,000 38%
The tax rates listed were
all enacted by the beginning of 2009. Riley reports under the PE GAAP future
income taxes method.
Instructions
(a) Assume that Riley Inc.
uses a valuation allowance to account for future tax assets, and also that it
is more likely than not that 25% of the carryforward benefits will not be
realized. Prepare the journal entries for 2011 and 2012.
(b) Based on your entries in
(a), prepare the income tax section of the 2011 and 2012 income statements,
beginning with the line “Income (loss) before income taxes.”
(c) Indicate how the future
tax asset account will be reported on the December 31, 2011 and 2012 balance
sheets.
(d) Assume that on June 30,
2012, the enacted tax rates changed for 2012. Should management record any
adjustment to the accounts? If yes, which accounts will be involved and when
should the adjustment be recorded?
(e) Repeat part (c) assuming
Riley Inc. follows IFRS.
(a) 2011
Income Tax Refund Receivable............. 71,400
Current
Income Tax Benefit
(Due to
Loss Carryback)........... 71,400
[34% X $120,000] + [34% X $90,000]
= $71,400
Future Income Tax Asset.................. 26,600
Future
Income Tax Benefit
(Due
to Loss Carryforward)........ 26,600
38% X ($280,000 – $120,000 –
$90,000) = $26,600
Future Income Tax Benefit
(Due to Loss
Carryforward).......... 6,650
Allowance to
Reduce Future Income Tax
Asset to
Expected Realizable Value 6,650
($26,600 X 25%)
2012
Current Income Tax Expense............... 57,000
Income Tax
Payable................... 57,000 **
*[($220,000
– $70,000) X 38%]
Future Income Tax Expense................ 26,600
Future
Income Tax Asset.............. 26,600
($0 –
$26,600)
Allowance to Reduce Future Income Tax
Asset to
Expected Realizable Value 6,650
Future
Income Tax Expense
(Due to
Loss Carryforward)........ 6,650
(b) 2011
Operating loss before income taxes $(280,000 )
Income tax benefit
Current
benefit due to loss carryback $71,400
Future
benefit due to loss carryforward 19,950 91,350
Net loss $(188,650 )
2012
Operating income before income taxes $220,000
Income taxes
Current
income tax expense $57,000
Future
income tax expense 19,950 76,950
Net income $143,050
(c)
|
Current assets:
|
2011
|
|
2012
|
|
Future Income Tax Asset
|
$
26,600
|
|
-
|
|
|
|
|
|
|
Less:
Allowance to Reduce Future Income Tax Asset to Expected Realizable Value
|
(6,650)
|
|
-
|
|
|
|
|
|
|
Future Tax Asset (net)
|
$
19,950
|
|
-
|
(d) Both
the Future Tax Asset account and the Allowance to Reduce Future Income Tax
Asset to Expected Realizable Value allowance
account should be adjusted for the change in the enacted tax rates for 2012.
This adjustment should be recorded in the accounts as soon as it is known and
can be measured.
(e) The
only difference is the future income tax asset would be classified as a
non-current asset on the statement of financial position.
