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 $36 million attributable to a temporary book-tax difference of $90 million in a liability for estimated expenses. At the end of 2018, the temporary difference is $80 million. Payne has no other temporary differences. Taxable income for 2018 is $230 million and the tax rate is 40%.

Payne has a valuation allowance of $10 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.

Explanation / Answer

Part-1 Event Account Debit Credit 1 Income Tax Expense 96 92+4 Deferred Tax Asset 4 (40% of 80)-36 Income Tax Payable 92 230*40% 2. Valuation Allowance-Deferred Tax Asset 10 Income Tax Expense 10 Part-2 Event Account Debit Credit 1 Income Tax Expense 96 92+4 Deferred Tax Asset 4 (40% of 80)-36 Income Tax Payable 92 230*40% 2. Valuation Allowance-Deferred Tax Asset 2 Income Tax Expense 2 (1/4*32)-10

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