Andrew Weiman and Mei Lee are discussing accounting for income taxes. They are currently studying a schedule of taxable and deductible amounts that will arise in the future as a result of existing temporary differences. The schedule applies to a company that reports under the PE GAAP future income taxes method. The schedule is as follows:
(a) Explain the concept of future taxable amounts and future deductible amounts as shown in the schedule.
(b) Determine the balance of the future income tax asset and future income tax liability accounts on the December 31, 2011 balance sheet. Assuming all temporary differences originated in 2011, prepare the journal entry to recognize income tax expense for 2011.
(c) Assume that this company is not expected to perform well in the future due to a sluggish economy and in-house management problems. Identify any concerns you may have about reporting the future tax asset/liability account as calculated.
(d) Company management determines that it is unlikely that the company will be able to benefit from all of the future deductible amounts. Early in 2012, after the entries in (b) have been made, but before the financial statements have been finalized and released, management estimates that $2.0 million of the $2.4 million in future deductible amounts will not be used, and that the remaining amount will be deductible in 2014. Prepare the entry that is required to recognize this, assuming the company uses a valuation allowance to adjust the future income tax asset account.
(e) When finalizing the 2012 financial statements, management estimates that, due to the prospects for an economic recovery, it is now more likely than not that the company will benefit from a total of $2.1 million of the future deductible amounts: $600,000 in 2014 and $1.5 million in 2015. Prepare the journal entry that is required, if any, to adjust the allowance account at December 31, 2012.
(f) Indicate how the future income tax accounts will be reported on the December 31, 2011 and 2012 balance sheets after taking into account the information in (d) and (e) above. Explain how these would differ, if at all, if the company did not use a valuation allowance account.
(g) How would your responses to (f) change if the company followed IFRS?

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