Question

This is chapter 16 E-11 of Intermediate Accounting 2 by the authors Spiceland, Nelson, and Thomas.

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 $70 million. Payne has no other temporary differences. Taxable income for 2018 is $180 million and the tax rate is 40%. Payne has a valuation allowance of $10 million for the deferred tax asset at the beginning of 2018. 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.

If deferred asset is normally a credit balance when it is decreased from 30,000,000 to 28,000,000 wouldn't it be debited in the above journal entry instead of credited?

Answer 1

Ending Bal. = 70 Million x 40%	$  28,000,000.00
Less: Beginning Bal. 75 mill x 40%	$ (30,000,000.00)
Deferred Tax Assets	$   (2,000,000.00)
When there is decrease in a deferred tax asset it would be credited
In this case deferred tax asset has reduced that’s why it will be credited.