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 2021. Riley reports under the ASPE future income taxes method.

Instructions

a. Prepare the journal entries for each of the years 2021 to 2024 to record income tax. Assume the tax loss is first carried back and that, at the end of 2023, 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 2023 and 2024 income statements, beginning with the line “Income (loss) before income tax.”

c. Prepare the journal entries for 2023 and 2024. 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 2023 and 2024 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) 2021 2022 2023 2024 $120,000 90,000 (280,000) 220,000 Tax Rate 25% 25% 30% 30%