Question

At the end of 2015, 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 2016, the temporary difference is $80 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2016 is $205 million and the tax rate is 40%.

Required: 1. Prepare the journal entry(s) to record Payne’s income taxes for 2016, assuming it is more likely than not that the deferred tax asset will be realized. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

2. Prepare the journal entry(s) to record Payne’s income taxes for 2016, assuming it is more likely than not that one-fourth of the deferred tax asset will ultimately be realized. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Answer

1.

Journal entry to record Payne’s income taxes for 2016: assuming it is more likely than not that the deferred tax asset will be realized.

Date	Particulars	Dr in millions	Cr in millions
1	Income tax expense(82+8)	$90
	Deferred tax asset(w.n.)		$8
	Income tax payable(205*40%)		$82
2	No journal entry required

Deferred tax asse = (Opening diff - closing diff)*40%

                          =($100-$80)40% = 8

2. The journal entry to record Payne’s income taxes for 2016:assuming it is more likely than not that one-fourth of the deferred tax asset will ultimately be realized.

Date	Particulars	Dr in millions	Cr in millions
	Income tax expense	$106
	Valuation allowance deferred tax asset		$16
	Deferred tax asset		$8
	Income tax payable		$82

Valuation allowance = Total deferred asset at the end*40%*50%

                             =$80*40%*50% = $16