Question

Exercise 16-13 (Algo) Deferred tax asset; income tax payable given; previous balance in valuation allowance [LO16-4]

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $105 million attributable to a temporary book-tax difference of $420 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $320 million. Payne has no other temporary differences. Taxable income for 2021 is $756 million and the tax rate is 25%.

Payne has a valuation allowance of $42 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.

• 1

  Record 2021 income taxes.

• 2

  Record valuation allowance for the end of 2021.

• 1

  Record 2021 income taxes.

• 2

  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	$214.00
	To Deferred Tax Assets [($420-$320)*25%]		$25.00
	To Income Tax Payable ($756*25%)		$189.00
	(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2	Valuation allowance - Deferred tax assets Dr	$42.00
	To Income tax expense		$42.00
	(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	$214.00
	To Deferred Tax Assets [($420-$320)*25%]		$25.00
	To Income Tax Payable ($756*25%)		$189.00
	(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2	Income tax expense Dr	$18.00
	To Valuation Allowance - Deferred Tax Assets [($320*75%)*25% - $42]		$18.00
	(To record valuation allowance for deferred tax assets)