Question

At the end of 2023 , Payne Industries had a deferred tax asset account with a balance of $110 million attributable to a temporary book-tax difference of $440 million in a liability for estimated expenses. At the end of 2024 , the temporary difference is $336 million. Payne has no other temporary differences. Taxable income for 2024 is $792 million and the tax rate is 25%. Payne has a valuation allowance of $44 million for the deferred tax asset at the beginning of 2024. Required: 1. Prepare the journal entry(s) to record Payne's income taxes for 2024 , assuming it is more likely than not that the deferred tax asset will be realized in full.

Answer 1

To record Payne's income taxes for 2024, calculate the change in the deferred tax asset and the tax expense based on the taxable income and tax rate. The journal entries reflect the tax expense, adjustments to the deferred tax asset, and the reversal of the valuation allowance due to the anticipation that the asset will be fully realized.

Step-by-step explanation:

To record Payne's income taxes for 2024, we first calculate the deferred tax asset at the end of the year. The difference in the temporary book-tax differences from 2023 ($440 million) to 2024 ($336 million) is $104 million. With a tax rate of 25%, the change in the deferred tax asset is $104 million × 25% = $26 million. The tax expense for the year is the taxable income times the tax rate, which is $792 million × 25% = $198 million. Because it is assumed that the deferred tax asset will be realized in full, the valuation allowance of $44 million would be reversed. The journal entries would be:

• Income Tax Expense Debit: $198 million
• Deferred Tax Asset Credit: $26 million (reduction in the asset due to reduced difference)
• Income Taxes Payable Credit: $172 million (the balance)
• Valuation Allowance Debit: $44 million (reversal of the initial allowance)
• Deferred Tax Asset Credit: $44 million (offsetting the valuation allowance reversal)