Question

In 2020, HD had reported a deferred tax asset of $170 million with no valuation allowance. At December 31, 2021, the account balances of HD Services showed a deferred tax asset of $220 million before assessing the need for a valuation allowance and income taxes payable of $100 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2021. What amount should HD report as income tax expense in its 2021 income statement? (Round your calculations to the nearest whole million.)Multiple Choice $60 million $156 million $100 million $116 million

Answer 1

HD should report $100 million as income tax expense in its 2021 income statement.

Step-by-step explanation:

To determine the amount HD should report as income tax expense in its 2021 income statement, we need to calculate the valuation allowance. HD's deferred tax asset at December 31, 2021, was $220 million before assessing the need for a valuation allowance. Since HD determined that 30% of the deferred tax asset ultimately would not be realized, we need to calculate 30% of $220 million, which equals $66 million. This $66 million is the amount that HD should report as a valuation allowance.

Next, we need to calculate the income tax expense. The income taxes payable at December 31, 2021, were $100 million. Subtracting the valuation allowance ($66 million) from the deferred tax asset ($220 million) gives us a net deferred tax asset of $154 million. However, since HD made no estimated tax payments during 2021, the income tax expense should be equal to the income taxes payable, which is $100 million.

Therefore, HD should report $100 million as income tax expense in its 2021 income statement.

Answer 2

The income tax expense for HD in 2021 is calculated by adding the valuation allowance to the income taxes payable and then adjusting for the net change in the deferred tax asset. The expense is $150 million. However, this amount does not match any of the provided multiple-choice options.

Step-by-step explanation:

To calculate the income tax expense for HD Services in its 2021 income statement, we need to consider the change in the deferred tax asset and the valuation allowance required for the part that won't be realized. Initially, the deferred tax asset is $220 million, but HD expects that 30% of that will not be realized. This means a valuation allowance of 30% of $220 million, which equals $66 million, has to be set up.

The tax expense will comprise the valuation allowance plus the income taxes payable. Thus, the total income tax expense will be the $66 million valuation allowance added to the $100 million income taxes payable, totaling $166 million. However, because we are asked for the amount of expense in the income statement, we need to consider the change in deferred tax asset. The change is from $170 million to $(220 million - 66 million for the valuation allowance) which is $154 million. The net change is an increase of $154 million - $170 million = -$16 million.

Therefore, the income tax expense to report will be $166 million minus the $16 million decrease in the net deferred tax asset, which results in a total of $150 million. However, none of the provided multiple-choice answers include $150 million, indicating a possible error in the question or answer choices. We should review the question and ensure that all pertinent details have been considered.