Chapter 16 Solution

E 16–11

[Deferred tax asset; income tax payable given; previous balance in valuation allowance ] (This is a variation of Exercise 16–10, modified to assume a previous balance in the valuation allowance.) At the end of 2012, Payne Industries had a deferred tax asset account with a balance of $30 million attributable to a temporary book-tax difference of $75 million in a liability for estimated expenses. At the end of 2013, the temporary difference is $70 million. Payne has no other temporary differences. Taxable income for 2013 is $180 million and the tax rate is 40%. Payne has a valuation allowance of $10 million for the deferred tax asset at the beginning of 2013. Required: 1. Prepare the journal entry(s) to record Payne's income taxes for 2013, assuming it is more likely than not that the deferred tax asset will be realized. 2. Prepare the journal entry(s) to record Payne's income taxes for 2013, assuming it is more likely than not that one-half of the deferred tax asset will ultimately be realized.

Exercise 16–11

Requirement 1

Current Year 2013 ($ in millions) Future Deductible Amounts

Temporary difference: Taxable income Enacted tax rate Tax payable currently Deferred tax asset Deferred tax asset: Ending balance (balance currently needed) Less: beginning balance ($75 x 40%) Change needed to achieve desired balance Journal entries at the end of 2013 Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above) Valuation allowance – deferred tax asset Income tax expense

Of course, these two entries can be combined.

(70) 180 40% 72

40% (28)  $ 28 (30) $( 2)

74 2 72 10 10

Requirement 2

($ in millions)

Income tax expense (to balance) Deferred tax asset (determined above) Income tax payable (determined above)

74 2 72

Income tax expense 4 1/ x $28] – $10) Valuation allowance—Deferred tax asset ([ 2

Of course, these two entries can be combined.

4

E 16–16 [Change in tax rates;...