Question

Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2016 due to a single cumulative temporary difference of $375,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2017 is $820,000. The tax rate is 40% for all years. JCC had a valuation account related to its deferred tax asset of $45,000.

Requirements:

a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized in full.

b) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that none of the deferred tax asset will be realized.

Answer 1

Jennifer Capriati Corp. must calculate income tax expense, deferred income taxes, and income taxes payable for 2017 based on whether the deferred tax asset is expected to be realized in full or not. In Scenario A, the income tax expense is $358,000 with income taxes payable of $328,000, with a $30,000 increase in deferred tax asset. In Scenario B, the company would write off the whole deferred tax asset and valuation account against the income tax expense, totaling $508,000.

Step-by-step explanation:

Calculating Deferred Tax and Income Taxes

For Jennifer Capriati Corp. (JCC), calculating the income tax expense, deferred income taxes, and income taxes payable for 2017 involves several steps, considering whether the deferred tax asset will be realized in full or not at all.

Scenario A: Deferred Tax Asset Realized in Full

If it is more likely than not that the deferred tax asset will be realized in full:

The increase in cumulative temporary difference is $450,000 - $375,000 = $75,000.

Deferred tax asset increase for 2017 is $75,000 x 40% = $30,000.

Income taxes payable is $820,000 x 40% = $328,000.

Income tax expense is the sum of income taxes payable and the change in deferred tax asset, which is $328,000 + $30,000 = $358,000.

Scenario B: No Deferred Tax Asset Realized

If it is more likely than not that none of the deferred tax asset will be realized:

The entire deferred tax asset of $150,000 plus the increase of $30,000 should be written off against the valuation account.

Income taxes payable remains the same at $328,000.

Income tax expense would now include the write-off of the deferred tax asset, so it is $328,000 + $180,000 = $508,000.

In both scenarios, the accounting involves adjusting the deferred tax asset account and recognizing the appropriate income tax expense and income taxes payable.

Answer 2

Step-by-step explanation:

The journal entries are shown below:

a. Deferred tax asset A/c Dr $30,000 ($450,000 × 40% - $150,000)

Income tax expense A/c Dr $298,000

To Income tax payable $328,000 ($820,000 × 40%)

(Being the income tax expense, deferred income tax is recorded and the remaining amount is debited to the income tax expense account)

b. Income tax expense A/c Dr $45,000

To Deferred tax asset - valuation adjustment $45,000

(Being income tax expense and valuation account is recorded)