Question

12- At the end of 2020, Payne Industries had a deferred tax asset account with a...

12- At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $50 million attributable to a temporary book-tax difference of $200 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $144 million. Payne has no other temporary differences. Taxable income for 2021 is $360 million and the tax rate is 25%.

Payne has a valuation allowance of $20 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.

(A/ Record 2021 income taxes. B/Record valuation allowance for the end of 2021.

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.
(A/ Record 2021 income taxes. B/Record valuation allowance for the end of 2021.

Homework Answers

Answer #1

Solution 1:

Payne Industries
Journal Entries
Event Particulars Debit (In Million) Credit (In Million)
1 Income tax expense Dr $104.00
            To Deferred Tax Assets [($200-$144)*25%] $14.00
            To Income Tax Payable ($360*25%) $90.00
(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2 Valuation allowance - Deferred tax asset Dr $20.00
            To Income Tax Expense $20.00
(To record reversal of valuation allowance)

Solution 2:

Payne Industries
Journal Entries
Event Particulars Debit (In Million) Credit (In Million)
1 Income tax expense Dr $104.00
            To Deferred Tax Assets [($200-$144)*25%] $14.00
            To Income Tax Payable ($360*25%) $90.00
(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2 Income tax expense Dr $7.00
            To Valuation Allowance - Deferred Tax Assets [($144*75%)*25% - $20] $7.00
(To record valuation allowance for deferred tax assets)
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