2018-Version A XYZ, Inc. reports tax The tax rate is expected to increase to fut
ID: 2334701 • Letter: 2
Question
2018-Version A XYZ, Inc. reports tax The tax rate is expected to increase to future S20,000 2. ble income of $200,000 for 2008 and has a 30% marginal tax rate. 40% next year and remain at 40% for the foreseeable which represented an uncertain tax position (note, taxabile trom the determination of taxable income was a questionable deduction of S220,000 if the deduction had not been taken). Despite this uncertainty, income would have been They further anticipate the following probabilities of different antieano feel the deduction satisfies the"more likely than no criteria. outcomes with the IRS $15,000 $12,000 S10,000 30% $5,000 So 15% 10% What is the journal entry that XVZ Inc, will record to account for this uncertain tas position? If XYZ. Inc. is audited in 2009 and the IRS determines that only $15,000 of the deduction was allowed, what would the journal entry be to record the additional taxes due (ignore interest and penalties)?Explanation / Answer
1. Uncertainity over tax treatment in this case is a contingent liability. A contingent liability is recorded in books if there is a possibility of payment and the amount can be reasonably estimated. In the given case, the company feels that IRS would "more likely than not" allow the deduction of 20,000. It means there is more than 50% probability that IRS might accept the deduction. Hence in my opinion there is no need to record any tax liability in 2008
2. If IRS allows only 15,000 of the deduction, tax is required to be paid on the balance 5,000 @40%, the amount payable will be $2,000. Since this is a prior period adjustment, Management should determine if this is a material transaction or not.
If the tranasction is material, the 2008 financial statements will have to be re-stated by reducing retained earnings (if single year financials are presented) and crediting Income tax payable.
If the transaction is not material, the following entries will need to be made.
Income tax expense a/c Dr 2,000
To Income tax payable 2,000
(To record income tax payable)
Income tax payable Dr 2,000
To Bank account 2,000
(To record payment made)
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.