Question

At 12-31-2015, Sampson Company had a gross deferred income tax asset of $190,000 and a valuation allowance of $70,000. At 12-31-2016, Sampson Company had a deferred income tax asset of $300,000. At 12-31-2016, the management of Sampson Company believed that there was a 60% probability that $205,000 of the income tax benefits from the gross deferred income tax asset would be realized and a 20% probability that the other $95,000 of the income tax benefits from the gross deferred income tax asset would be realized. Pretax book income was $2,000,000 for 2016. Income taxes payable as a result of filing the income tax return for 2016 were $800,000.

What was net income for 2016 for Sampson ?

Answer 1

Solution:

Valuation allowance at 31.12.2016 = ($205,000*40%) + ($95,000*80%) = $158,000

Gross Deferred tax assets at 31.12.2016 = $300,000

Net Deferred tax assets at 31.12.2016 = $300,000 - $158,000 = $142,000

Net deferred tax assets at 31.12.2015 = $190,000 - $70,000 = $120,000

Deferred tax assets recognized in 2016 = $142,000 - $120,000 = $22,000

Income tax expense for 2016 = Income tax payable - Deferred tax assets recognized = $800,000 - $22,000 = $778,000

net Income for 2017 = Pre tax book income - Income tax expense = $2,000,000 - $778,000 = $1,222,000