Question

CH16 (7.)

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $34 million attributable to a temporary book–tax difference of $85 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 $185 million and the tax rate is 40%.

Required:

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 2:

Payne Industries
Journal Entries
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$76.00
	To Deferred Tax Assets [($85-$80)*40%]		$2.00
	To Income Tax Payable ($185*40%)		$74.00
	(Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal )
2	Income tax expense Dr	$24.00
	To Valuation Allowance - Deferred Tax Assets [($80*75%)*40%]		$24.00
	(To record valuation allowance for deferred tax assets)