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.

See the explanation below.

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.

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