Question

Carly Inc. reported the following accounting income (loss) and related tax rates during the years 2006 to 2012:
Accounting income (loss) and taxable income (loss) were the same for all years since Carly began business. The tax rates from 2009 to 2012 were enacted in 2009.
Instructions
(a) Prepare the journal entries to record income taxes for the years 2010 to 2012. Assume that Carly uses the carryback provision where possible and expects to realize the benefits of any loss carryforward in the year that immediately follows the loss year.
(b) Indicate the effect of the 2010 entry(ies) on the December 31, 2010 balance sheet. Assume Carly follows the PE GAAP future income taxes method. Indicate as well the balance sheet impact if Carly reported under IFRS.
(c) Show how the bottom portion of the income statement would be reported in 2010, beginning with “Loss before income taxes.”
(d) Indicate how the bottom portion of the income statement would be reported in 2011, starting with “Income before income taxes.”
(e) Prepare the journal entries for the years 2010 to 2012 to record income taxes, assuming that Carly uses the carryback provision where possible but is uncertain if it will realize the benefits of any loss carryforward in the future. Carly does not use a valuation allowance.
(f) Assume now that Carly uses a valuation allowance account along with its future tax asset account. Identify which entries in (e) would differ and prepare them.
(g) Based on your entries in (e), indicate how the bottom portion of the income statements for 2010 and 2011 would be reported, beginning with “Income (loss) before income taxes.”
(h) From a cash flow perspective, can you think of any advantage in using the valuation allowance for financial reporting purposes? Can you think of any advantages in not using it?


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  • CreatedAugust 23, 2015
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