Question

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.

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)