Question

In 2020, HD had reported a deferred tax asset of $90 million with no valuation allowance. At December 31, 2021, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2021. What amount should HD report as income tax expense in its 2021 income statement?

A. $50 million

B. $80 million

C. $86 million

D. $116 million

Please show work.

Answer 1

We derive total income tax expense from the formula:

Total income tax expense in 2021= reduction in deferred tax asset in 2021 + income tax payable in 2021

We can also find that Reduction in deferred tax asset in 2021 = deferred tax asset balance - realizable deferred tax asset

                                                                   = 90 miillion - (120 million*70%)

                                                                   = 90 million - 84 million

                                                                   = 6 million

Now computing the above values :

Total income tax expense in 2021= 80 million + 6 million

                                                         = 86 million

Hence correct option is (C).