Question

Delta Catfish Company has taken a position in its tax return to claim a tax credit of $26 million (direct reduction in taxes payable) and has determined that its sustainability is “more likely than not,” based on its technical merits. Delta has developed the probability table shown below of all possible material outcomes:

Probability Table ($ in millions)
Amount of the tax benefit that management expects to receive	$	26			$	20.8			$	15.6			$	10.4			$	5.2
Percentage likelihood that the tax benefit will be sustained at this level		10	%			20	%			25	%			20	%			25	%

Delta’s taxable income is $101 million for the year. Its effective tax rate is 40%. The tax credit would be a direct reduction in current taxes payable.

Required:
1. At what amount would Delta measure the tax benefit in its income statement?
2. Prepare the appropriate journal entry for Delta to record its income taxes for the year.
  

Answer 1

1)
Probability Table ($ in millions)
Amount of the tax benefit that management expects to receive	26	20.8	15.6	10.4	5.2
Percentage likelihood that the tax benefit will be sustained at this level	10%	20%	25%	20%	25%
Cumulative probability that the tax position will be sustained	10%	30%	55%	75%	100%
Delta Would measure $15.6 million tax benefit in its income statement as it represents the largest amount of benefit that is more than 50 percent likely to be the end result.
2)	Amount in Millions
Account Titles	Debit	Credit
Income tax expense ([$101 × 40%] – $15.6 tax credit)	24.8
Income tax payable ([$101 × 40%] – $26 tax credit)		14.4
Liability—projected additional tax		10.4