At the end of 2017, Payne Industries had a deferred tax asset account with a bal

Question

At the end of 2017, Payne Industries had a deferred tax asset account with a balance of $34 million attributable to a temporary book–tax difference of $85 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $80 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2018 is $185 million and the tax rate is 40%. 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.

Explanation / Answer

Date Account title and Explanation Debit Credit 1 Income tax expense 76 Deferred tax asset 2 Income tax Payable 74 (To record Income tax expense) 2 Income tax expense 76 Deferred tax asset 2 Income tax Payable 74 (To record Income tax expense) Income tax Expense 24 (3/4)*(80*0.4)-0 Valuation allowance - Deferred tax asset 24 (To record valuation allowance)

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