At the end of the preceding year, World Industries had a deferred tax asset of $

Question

At the end of the preceding year, World Industries had a deferred tax asset of $22,000,000, attributable to its only temporary difference of $59,000,000 for estimated expenses. At the end of the current year, the temporary difference is $54,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,900,000 for the current year and the tax rate is 30% for all years.

Prepare journal entries to record World Industries' income tax expense for the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

At the end of the preceding year, World Industries had a deferred tax asset of $22,000,000, attributable to its only temporary difference of $59,000,000 for estimated expenses. At the end of the current year, the temporary difference is $54,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,900,000 for the current year and the tax rate is 30% for all years.

Explanation / Answer

Working Note :-

1). Deferred Tax Assets = ($54000000 * 30%) - $22000000 = ($5800000)

2). Income Tax Payable = $12900000 * 30% = $3870000

3). Valuation Allowance in deferred tax = (1/3)*($54000000*30%) = $5400000

Journal Entry :-

Date Particulars Debit ($) Credit ($) Income Tax Expenses A/c Dr. 15070000 To Deferred Tax Payable(Working note 1) 5800000 To Income tax Payable(Working note 2) 3870000 To Valuation allowance- Deferred tax asset(Working note 3) 5400000

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