Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $110 million attributable to a temporary book-tax difference of $440 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $336 million. Payne has no other temporary differences. Taxable income for 2021 is $792 million and the tax rate is 25%.

Payne has a valuation allowance of $44 million for the deferred tax asset at the beginning of 2021.

Required:
1. Prepare the journal entry(s) to record Payne’s income taxes for 2021, 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 2021, assuming it is more likely than not that only one-fourth of the deferred tax asset ultimately will be realized.

Answer 1

Answer:

1.)

Payne Industries
Journal Entries
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$224
	To Deferred Tax Assets [($440-$336)*25%]		$26
	To Income Tax Payable ($792*25%)		$198
	(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2	No Journal Entry Required

2)

Journal Entries
Event	Particulars	Debit (In Million)	Credit (In Million)
1	Income tax expense Dr	$224
	To Deferred Tax Assets [($440-$336)*25%]		$26
	To Income Tax Payable ($792*25%)		$198
	(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )
2	Income tax expense Dr	$63
	To Valuation Allowance - Deferred Tax Assets [($336*75%)*25%]		$63
	(To record valuation allowance for deferred tax assets)