Question

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $40 million attributable to a temporary book–tax difference of $100 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $80 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2018 is $205 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

a. Deffered tax assets/Liabilities are recognised when there are temporary difference between Book Profits and Tax Profits.

b. As per revelant accouting standard Deffered tax assets/Liabilities should be recognised only when there is virtual certainty that deferred tax assets will be realised.

c. In the given question we are asked to Pass Income taxes Journal entry in two situations :

	Amount in $
Particulars	Dr.	Cr.
Situation 1. It is more likely than not that the deferred tax asset will be realized
Current Tax a/c Dr. (205*40%)	82
Deffered Tax Expenses A/C Dr. (100-80)*40%	8
To Income tax payable A/c (205*40%)		82
Deffered tax Assets A/c (100-80)*40%		8
Situation 2. it is more likely than not that one-fourth of the deferred tax asset will ultimately be realized
Current Tax a/c Dr. (205*40%)	82
Deffered Tax Expenses A/C Dr. (100-(80/4))*40%	32
To Income tax payable A/c (205*40%)		82
Deffered tax Assets A/c (100-80)*40%		32