At the end of the preceding year, World Industries had a deferred tax asset of $17,500,000, attributable to its only temporary difference of $70,000,000 for estimated expenses. At the end of the current year, the temporary difference is $45,000,000. At the beginning of the year there was no valuation account for the deferred tax asset. At year-end, World Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,000,000 for the current year and the tax rate is 25% for all years. Required: Prepare journal entries to record World Industries' income tax expense for the current year. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer is explained in the explanation section below.

Explanation:

Solution:

Data Given:

Deferred Tax Asset = $17,500,000

Temporary Difference = $45,000,000

Taxable Income = $12,000,000

Tax Rate = 25%

First of all we need to find the income tax expense for the current year.

Income Tax Expense for the current year:

Deferred Tax Asset = (Temporary Difference x Tax Rate) - (Deferred Tax Asset at the end of the preceding year)

Deferred Tax Asset = ($45,000,000 x 25%) - $17,500,000

Income Tax Payable = (Taxable income x Tax Rate)

Income Tax Payable = ($12,000,000 x 25%)

Valuation Allowance in Deferred Tax = ( one third of the temporary deference of the current year x Tax Rate)

Valuation Allowance in Deferred Tax = (1/3 x $45,000,000 x 25%)

Journal Entries are attached in the attachment. Please refer to the attachment.

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