Question

Delta Catfish Company has taken a position in its tax return to claim a tax credit of $10 million (direct reduction in taxes payable) and has determined that its sustainability is “more likely than not,” based on its technical merits. Delta has developed the probability table shown below of all possible material outcomes ($ in millions): 

 

Delta’s taxable income is $84 million for the year. Its effective tax rate is 25%. The tax credit would be a direct reduction in current taxes payable. 

 

Required: 

1. At what amount would Delta measure the tax benefit in its income statement? 

2. Prepare the appropriate journal entry for Delta to record its income taxes for the year.

Answer 1

Part 1

Amount of the tax benefit that management expects to receive	$ 10	$ 8	$ 6	$ 4	$ 2
Percentage likelihood that the tax benefit will be sustained at this level	10%	20%	25%	20%	25%
Cumulative Percentage likelihood that the tax benefit will be sustained at this level	10%	30%	55%	75%	100%

 

Delta measure the tax benefit in its income statement			$ 6	million
Maximum amount of benefits selected with Cumulative Percentage at least 50%. Thus, 6 million amount would Delta measure the tax benefit in its income statement.

 

Part 2

 

No	Event	General Journal	Debit	Credit
1	1	Income tax expense ((84 × 25%)-6)	15
		Income tax payable ((84 × 25%)-10)		11
		Projected additional tax liability (10-6)		4
		To record its income taxes for the year.

Thus, 6 million amount would Delta measure the tax benefit in its income statement.