Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $85 million attributable to a temporary book-tax difference of $340 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $256 million. Payne has no other temporary differences. Taxable income for 2021 is $612 million and the tax rate is 25%.

Payne has a valuation allowance of $34 million for the deferred tax asset at the beginning of 2021.

Required:
1. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that the deferred tax asset will be realized in full.
2. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that only one-fourth of the deferred tax asset ultimately will be realized.

Answer 1

ANSWER:

Requirement 1

($ in million)

   current year Future deductible    2021    amounts

Temporary difference (256)

Taxable Income 612

Enacted tax rate 25% 25%    153 64

DEFERRED TAX ASSET:

Ending balance    $64

Less : beginning balance ($340x25%) (85)

CHANGE NEEDED TO ACHIVE DESIRED BALANCE ($21)

Journal entries at the ene of 2021

1) Income tax expense (to balance) $ 174

Deferred tax asset ( as calculated above) $ 21   

Income tax payable (as calculated above) $153

2) Valuation allowance - deferred tax asset $34

Income tax expence $ 34

Requirement 2

1) Income tax expense (to balance) $174

  Deferred tax asset ( as calculated above) $ 21   

Income tax payable (as calculated above) $153

2) Income tax expense ($2)

Valuation allowance - deferred tax asset [(1/2*64)-34] ($2)