Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $55 million attributable to a temporary book-tax difference of $220 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $160 million. Payne has no other temporary differences. Taxable income for 2021 is $396 million and the tax rate is 25%.

Payne has a valuation allowance of $22 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 in full.
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

Solutions:

H . General - = Excel 8 - Microsoft Excel - X File Home Insert Page Layout Formulas Data Review View Calibri 11 A A = = General X Cut Copy Paste Format Painter Clipboard B I U NAM A **Wrap Text Merge & Center Alignment E 99 8. Insert % , Number Cell Styles Delete Format " Conditional Format Formatting as Table Styles AutoSum - A Fill- clear Sort & Find & Clear Filter - Select Editing Font Cells I Д A B C D G E H I J K L M N O P Q R S Solution 1: Payne Industries Journal Entries Event Particulars Income tax expense Dr To Deferred Tax Assets [($220-$160)*25%] To Income Tax Payable ($396*25%) (Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal) Debit (In Million) Credit (In Million) $114.00 $15.00 $99.00 2 $22.00 Valuation allowance - Deferred tax asset Dr To Income Tax Expense |(To record reversal of valuation allowance) $12.00 Solution 2: Payne Industries Journal Entries Event Particulars 1 Income tax expense Dr To Deferred Tax Assets [($220-$160)*25%] To Income Tax Payable ($396*25%) (Being income tax expense recorded for 2018 and deferred tax assets reversed for temporary differences reversal) Debit (In Million) Credit (in Million) $114.00 $15.00 $99.00 $8.00 Income tax expense Dr To Valuation Allowance - Deferred Tax Assets [($160*75%)*25% - $22] (To record valuation allowance for deferred tax assets) S8.00 29 30 Ho Sheet95 (8) Ready Circular References Sheet65 (8) Sheet107 (41) Sheet699 Sheet164 (5) Sheet164 (6) Sheet67 (6) Sheet62 BOO 75% © o 14:55 1» C ENG 12-03-2020 Type here to search Q e 9 X op ^ 2