Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $95 million attributable to a temporary book-tax difference of $380 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $288 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2021 is $684 million and the tax rate is 25%. Required: 1. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that the deferred tax asset will be realized in full. 2. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that only one-fourth of the deferred tax asset ultimately will be realized.

Answer 1

See the explanation below.

Step-by-step explanation:

1. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that the deferred tax asset will be realized in full.

Details Dr ($'Million) Cr ($'Million)

Income tax expenses 194

Deferred Tax Assets 23

Income Tax Payable 171

To record income tax expense for 2021 and deferred tax assets reversed for temporary differences reversal

Note the calculations:

Amount credited to Deferred Tax Assets = ($380 - $288) * 25% = $23 million

Amount credited to Income Tax Payable = $684 * 25% = $171 million

2. Prepare the journal entry(s) to record Payne’s income taxes for 2021, assuming it is more likely than not that only one-fourth of the deferred tax asset ultimately will be realized.

Details Dr ($'Million) Cr ($'Million)

Income tax expenses 194

Deferred Tax Assets 23

Income Tax Payable 171

To record income tax expense for 2021 and deferred tax assets reversed for temporary differences reversal.

Income tax expenses 54

Valuation Allowance - Deferred Tax Assets 54

To record valuation allowance for deferred tax assets. .

Note the calculations:

Amount credited to Valuation Allowance - Deferred Tax Assets = ($288 * (3/4)) * 25% = $54 miillion.