Question

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book–tax difference of $75 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $60 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2018 is $235 million and the tax rate is 40%.

Required:
1. Prepare the journal entry(s) to record Payne’s income taxes for 2018, assuming it is more likely than not that the deferred tax asset will be realized.
2. Prepare the journal entry(s) to record Payne’s income taxes for 2018, assuming it is more likely than not that one-fourth of the deferred tax asset will ultimately be realized.
  

Answer 1

Solution 1:

Payne Industries
Journal Entries
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$100.00
	To Deferred Tax Assets [($75-$60)*40%]		$6.00
	To Income Tax Payable ($235*40%)		$94.00
	(Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal )

Solution 2:

Payne Industries
Journal Entries
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$100.00
	To Deferred Tax Assets [($75-$60)*40%]		$6.00
	To Income Tax Payable ($235*40%)		$94.00
	(Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal )
2	Income tax expense Dr	$18.00
	To Valuation Allowance - Deferred Tax Assets [($60*75%)*40%]		$18.00
	(To record valuation allowance for deferred tax assets)