Question

Riverbed Inc. reported the following accounting income (loss) and related tax rates during the years 2015 to 2021: Accounting Tax Year Income (Loss) Rate 2015 $72,000 25% 2016 29,000 25% 2017 62,000 25% 2018 77,000 30% 2019 (220,000 ) 35% 2020 68,000 30% 2021 94,000 25% Accounting income (loss) and taxable income (loss) were the same for all years since Riverbed began business. The tax rates from 2018 to 2021 were enacted in 2018. Assume Riverbed Inc. follows ASPE for all parts of this question, except when asked about the effect of reporting under IFRS in part (b)

1)Prepare the journal entries to record income taxes for the years 2019 to 2021. Assume that Riverbed 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.

2)Show how the bottom portion of the income statement would be reported in 2019, beginning with “Loss before income tax.”

3)how how the bottom portion of the income statement would be reported in 2020, starting with “Income before income tax.”4)Prepare the journal entries for the years 2019 to 2021 to record income taxes, assuming that Riverbed uses the carryback provision where possible but is uncertain if it will realize the benefits of any loss carryforward in the future. Riverbed does not use a valuation allowance.

4)Assume now that Riverbed uses a valuation allowance account along with its Future Tax Asset account. Identify which entries in the previous part of the question would differ and prepare them.

5)Indicate how the bottom portion of the income statements for 2019 and 2020 would be reported. Assume that Riverbed uses the carryback provision where possible but is uncertain if it will realize the benefits of any loss carryforward in the future. Riverbed does not use a valuation allowance

Answer 1

The 2019 loss will be applied like this by the company:

	Pretax loss	Tax Rate	Tax Benefit
Carried back to 2017	$62,000	25%	$15,500 *
Carried back to 2018	$77,000	30%	$23,100 *
Carried forward to 2020	$81,000	30%	$24,300 **

* Refundable ** Deferred tax asset

pretax loss Carried forward to 2020 -

(2,20,000 - 77,000 - 62,000) = 81,000

The journal entries will be:

Date	Description	Debit	Credit
2019	DR Income Tax Refundable	$38600 $(15500+23100)
	DR Deferred Tax Asset	$24300
	CR Income tax expense (loss carryback)		$38600
	CR Income tax expense (loss carryforward		$24300
	To record for the income tax benefits of the loss carryback and carryforwards
2020	DR Income Tax Expense	$20400 (68000 * 30%)
	CR Deferred tax asset		$24300
	CR Income tax payable		$(3900)
	To record the income tax payable and the use of the income tax carryforwards
2021	DR Income Tax Expense	$23,500 $(94000 * 25%)
	CR Income tax payable		$23,500
	To record the income tax payable