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 $101 million for the year. Its effective
tax rate is 40%. The tax credit would be a direct reduction in
current taxes payable.
Required:
1. At what amount would Delta measure the tax
benefit in its income statement?
2. Prepare the appropriate journal entry for Delta
to record its income taxes for the year.
1) | |||||
Probability Table ($ 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 |
Delta Catfish Company has taken a position in its tax return to claim a tax credit of $26 million...
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