Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $40 million attributable to a temporary book-tax difference of $160 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $112 million. Payne has no other temporary differences. Taxable income for 2021 is $288 million and the tax rate is 25%.

Payne has a valuation allowance of $16 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

1.

Event	Particulars	Debit (in million)	Credit (in million)
1.	Income tax expense	$84
	Deferred tax assets [($160-$112)*25%]		$12
	Income tax payable ($288*25%)		$72
	(To record tax expenses for 2021 and deferred tax assets reversed for temporary differences reversal)
2.	Valuation allowence - Deferred tax asset	$16
	Income tax expense		$16

2.

Event	Particulars	Debit (in million)	Credit (in million)
1.	Income tax expense	$84
	Deferred tax assets [($160-$112)*25%]		$12
	Income tax payable ($288*25%)		$72
	(To record tax expenses for 2021 and deferred tax assets reversed for temporary differences reversal)
2.	Income tax ecpense Dr	$5
	Valuation allowence - Deferred tax assets [($112*75%)*25% - $16]		$5
	(To record valuation allowence for deferred tax assets)