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) Prepare the journal
entries for each of the years 2009 to 2012 to record income taxes, assuming the
tax loss is first carried back, and that at the end of 2011, the loss
carryforward benefits are judged more likely than not to be realized in the
future.
(b) Using the assumption as
in (a), prepare the income tax section of the 2011 and 2012 income statements,
beginning with the line “Income (loss) before income taxes.”
(c) Prepare the journal
entries for 2011 and 2012, assuming that it is more likely than not that 25% of
the carryforward benefits will not be realized. A valuation allowance is not
used by this company.
(d) Using the assumption in
(c), prepare the income tax section of the 2011 and 2012 income statements,
beginning with the line “Income (loss) before income taxes.”
(a) 2009
Current
Income Tax Expense........... 40,800
Income
Tax Payable ($120,000 X 34%) 40,800
2010
Current
Income Tax Expense........... 30,600
Income
Tax Payable ($90,000 X 34%) 30,600
2011
The 2011 loss of $280,000 is carried back, $120,000
to 2009 and $90,000 to 2010, leaving $70,000 to carryforward.
Income Tax Refund Receivable......... 71,400
Current
Income Tax Benefit
(Due to Loss Carryback).. 71,400 **
Future
Income Tax Asset.............. 26,600
Future Income Tax
Benefit
(Due to Loss Carryforward).. 26,600 **
**[34% X $120,000] + [34% X $90,000] = $71,400
**38% X ($280,000 – $120,000 –
$90,000) = $26,600
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)
(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 26,600 ( 98,000
Net loss $(182,000 )
2012
Operating income before income taxes $220,000
Income taxes
Current
income tax expense $57,000
Future
income tax expense 26,600 83,600
Net income $136,400
(c) 2011
Income Tax Refund Receivable......... 71,400
Current
Income Tax Benefit
(Due to Loss Carryback).. 71,400 **
Future
Income Tax Asset.............. 19,950
Future Income Tax
Benefit
(Due to Loss Carryforward).. 19,950 **
**[34% X $120,000] + [34% X $90,000] = $71,400
**38% X ($280,000 – $120,000 –
$90,000) =
$26,600 X 75% = $19,950
2012
Current
Income Tax Expense............ 57,000
Income
Tax Payable................ 57,000
[($220,000 – $70,000) X 38%]
Future
Income Tax Expense............. 19,950
Future
Income Tax Asset........... 19,950
($0 –
$19,950)
(d) 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
Note: For tax planning purposes, if the corporation anticipates
profitable years ahead, it may not carry back its losses in order to take
advantage of the higher rates for 2012 and beyond. The loss carryback is
optional.
