Question

Question #1

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $38 million attributable to a temporary book-tax difference of $95 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $85 million. Payne has no other temporary differences. Taxable income for 2018 is $240 million and the tax rate is 40%.

Payne has a valuation allowance of $11 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.
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.
  
Question #2

Fores Construction Company reported a pretax operating loss of $210 million for financial reporting purposes in 2018. Contributing to the loss were (a) a penalty of $10 million assessed by the Environmental Protection Agency for violation of a federal law and paid in 2018 and (b) an estimated loss of $10 million from accruing a loss contingency. The loss will be tax deductible when paid in 2019.

The enacted tax rate is 40%. There were no temporary differences at the beginning of the year and none originating in 2018 other than those described above. Taxable income in Fores’s two previous years of operation was as follows:

2016	$	115	million
2017		40	million

Required:
1. Prepare the journal entry to recognize the income tax benefit of the net operating loss in 2018. Fores elects the carryback option.
2. What is the net operating loss reported in 2018 income statement?
3. Prepare the journal entry to record income taxes in 2019 assuming pretax accounting income is $75 million. No additional temporary differences originate in 2019.

QUESTION #3

Sachs Brands' defined benefit pension plan specifies annual retirement benefits equal to: 1.5% × service years × final year's salary, payable at the end of each year. Angela Davenport was hired by Sachs at the beginning of 2004 and is expected to retire at the end of 2038 after 35 years' service. Her retirement is expected to span 18 years. Davenport's salary is $83,000 at the end of 2018 and the company's actuary projects her salary to be $245,000 at retirement. The actuary's discount rate is 9%. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.)

Required:

1. What is the company's projected benefit obligation at the beginning of 2018 (after 14 years' service) with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
2. Estimate by the projected benefits approach the portion of Davenport's annual retirement payments attributable to 2018 service.
3. What is the company's service cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
4. What is the company's interest cost for 2018 with respect to Davenport? (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)
5. Combine your answers to requirements 1, 3, and 4 to determine the company's projected benefit obligation at the end of 2018 (after 15 years' service) with respect to Davenport. (Do not round intermediate calculations. Round your final answer to nearest whole dollar.)

Answer 1

SOLUTION

Question-1

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
1.	Tax expense	100
	Deferred tax asset [(85*40%)*38]		4
	Taxes payable ($240*40%)		96
	Valuation allowance - DTA	11
	Tax expense		11

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
2.	Tax expense	100
	Deferred tax asset [(85*40%)*38]		4
	Taxes payable ($240*40%)		96
	Tax expense	7.2
	Valuation allowance - DTA {[(38*40%)*1/4]-11}		7.2

* As per Chegg guidelines, I have answered first question.