Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $120 million attributable to a temporary book-tax difference of $480 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $368 million. Payne has no other temporary differences. Taxable income for 2021 is $864 million and the tax rate is 25%.

Payne has a valuation allowance of $48 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.
  

Spiceland INT_10e_Rechecks_2019_12_10

Answer 1

Answer:

1)

Event	Particulars	Debit ($ in millions)	Credit ($ in millions)
1	Income taxe expense	244
	Deferred tax assets ((480-368)*25%)		28
	Income tax payable (864*25%)		216
	(Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal)
2	Valuation allowance - Deferred tax asset	48
	Income tax expense		48
	(To record reversal of valuation allowance)

2)

Event	Particulars	Debit ($ in millions)	Credit ($ in millions)
1	Income taxe expense	244
	Deferred tax assets ((480-368)*25%)		28
	Income tax payable (864*25%)		216
	(Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal)
2	Income tax expense	21
	Valuation Allowance - Deferred Tax Assets ((368*75%)*25%-48)		21
	(To record reversal of valuation allowance)