Exercise 16-13 (Algo) Deferred
Exercise 16-13 (Algo) Deferred tax asset; income tax payablegiven; previous balance in valuation allowance [LO16-4]
At the end of 2020, Payne Industries had a deferred tax assetaccount with a balance of $105 million attributable to a temporarybook-tax difference of $420 million in a liability for estimatedexpenses. At the end of 2021, the temporary difference is $320million. Payne has no other temporary differences. Taxable incomefor 2021 is $756 million and the tax rate is 25%.Payne has a valuation allowance of $42 million for the deferred taxasset at the beginning of 2021.Required:1. Prepare the journal entry(s) to record Payne’sincome taxes for 2021, assuming it is more likely than not that thedeferred tax asset will be realized in full.2. Prepare the journal entry(s) to record Payne’sincome taxes for 2021, assuming it is more likely than not thatonly one-fourth of the deferred tax asset ultimately will berealized.
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1
Record 2021 income taxes.
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2
Record valuation allowance for the end of 2021.
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1
Record 2021 income taxes.
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2
Record valuation allowance for the end of 2021.
Answer:
Solution 1:
| PayneIndustries | |||
| JournalEntries | |||
| Event | Particulars | Debit (InMillion) | Credit (InMillion) |
| 1 | Income tax expense Dr | $214.00 | |
| To Deferred Tax Assets [($420-$320)*25%] | $25.00 | ||
| To Income Tax Payable ($756*25%) | $189.00 | ||
| (Being income tax expense recorded for2021 and deferred tax assets reversed for temporary differencesreversal ) | |||
| 2 | Valuation allowance – Deferred taxassets Dr | $42.00 | |
| To Income tax expense | $42.00 | ||
| (To record reversal of valuationallowance) |
Solution 2:
| PayneIndustries | |||
| JournalEntries | |||
| Event | Particulars | Debit (InMillion) | Credit (InMillion) |
| 1 | Income tax expense Dr | $214.00 | |
| To Deferred Tax Assets [($420-$320)*25%] | $25.00 | ||
| To Income Tax Payable ($756*25%) | $189.00 | ||
| (Being income tax expense recorded for2021 and deferred tax assets reversed for temporary differencesreversal ) | |||
| 2 | Income tax expense Dr | $18.00 | |
| To Valuation Allowance – Deferred Tax Assets [($320*75%)*25% -$42] | $18.00 | ||
| (To record valuation allowance fordeferred tax assets) |
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