Question

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $32 million attributable to a temporary book- tax difference of $80 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $60 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2018 is $175 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

1.

No	Event	General Journal	Debit	Credit
1	1	Income tax expense	78.00
		Deferred tax asset [80-60]*40%		8
		Income tax payable [175 *40%]		70
2	2	No journal entry required

2.

No	Event	General Journal	Debit	Credit
1	1	Income tax expense	78.00
		Deferred tax asset [80-60]*40%		8
		Income tax payable [175 *40%]		70
2	2	Income tax expense	18
		Valuation allowance - deferred tax		18
		[60 *75%*40%]