Riley Inc. reports the following pre-tax incomes (losses) for both financial reporting purposes and tax purposes: 

The tax rates listed were all enacted by the beginning of 2018. Riley reports under the ASPE future/deferred income taxes method. 

Instructions 

a. Prepare the journal entries for each of the years 2018 to 2021 to record income tax. Assume the tax loss is first carried back and that, at the end of 2020, the loss carryforward benefits are judged more likely than not to be realized in the future. 

b. Using the assumptions in part (a), prepare the income tax section of the 2020 and 2021 income statements, beginning with the line “Income (loss) before income tax.” 

c. Prepare the journal entries for 2020 and 2021. Assume that it is more likely than not that one quarter of the carryforward benefits will not be realized. This company does not use a valuation allowance. 

d. Using the assumptions in part (c), prepare the income tax section of the 2020 and 2021 income statements, beginning with the line “Income (loss) before income tax.” 

e. Using the assumptions in part (c), discuss what information should be disclosed in the notes to the financial statements.

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Year Accounting Income (Loss) Tax Rate 2018 $ 120,000 25% 2019 90,000 25% 2020 (280,000) 30% 2021 220,000 30%