Question

B Inc., reports bad debt expense using the allowance method. For tax purposes the direct write-off method is used. At the end of the current year, B has accounts receivable and an allowance for uncollectible accounts of $5,000,000 and $200,000, respectively, and taxable income of $20,000,000. At the end of the previous year, B reported a deferred tax asset of $80,000 related to the difference in reporting bad debts, its only temporary difference. The enacted tax rate is 30% each year. Required: Prepare the appropriate journal entry for B to record the income tax provision for the current year. Show well-labeled supporting computations.

Answer 1

Solution:

Deferred tax assets balance at the beginning of year = $80,000

Required deferred tax asset balance at the end of current year = Balance in allowance for uncollectible accounts * tax rate

= $200,000 * 30% = $60,000

Deferred tax assets to be reversed during the year = $80,000 - $60,000 = $20,000

Income tax payable for the current year = Taxable income * Tax rate = $20,000,000 * 30% = $6,000,000

Journal Entries - B Inc.
Event	Particulars	Debit	Credit
1	Income tax expense Dr	$6,020,000.00
	To Income taxes payable		$6,000,000.00
	To Deferred tax Assets		$20,000.00
	(To record income tax expense for the year)