Question

At the end of 2020, Payne Industries had a deferred tax asset account with a balance of $70 million attributable to a temporary book-tax difference of $280 million in a liability for estimated expenses. At the end of 2021, the temporary difference is $208 million. Payne has no other temporary differences and no valuation allowance for the deferred tax asset. Taxable income for 2021 is $504 million and the tax rate is 25%.

Payne has a valuation allowance of $28 million for the deferred tax asset at the beginning of 2021.Required:A. 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.B. 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

A.

1. Dr Income tax expense $144

Cr To Deferred Tax Assets $18

Cr To Income Tax Payable $126

2. No Journal Entry

B.

1. Dr Income tax expense $144

Cr To Deferred Tax Assets $18

Cr To Income Tax Payable $126

2. Dr Income tax expense $39

Cr To Valuation Allowance - Deferred Tax Assets $39

Step-by-step explanation:

A. Preparation of the journal entry(s) to record Payne’s income taxes for 2021

1. Dr Income tax expense $144

($126+$18)

Cr To Deferred Tax Assets $18

[($280-$208)*25%]

Cr To Income Tax Payable $126

($504*25%)

(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )

2 No Journal Entry

B. Preparation of the journal entry(s) to record Payne’s income taxes for 2021

1. Dr Income tax expense $144

($126+$18)

Cr To Deferred Tax Assets $18

[($280-$208)*25%]

Cr To Income Tax Payable $126

($504*25%)

(Being income tax expense recorded for 2021 and deferred tax assets reversed for temporary differences reversal )

2. Dr Income tax expense $39

Cr To Valuation Allowance - Deferred Tax Assets $39

[($208*75%)*25%]

(To record valuation allowance for deferred tax assets)