At the end of the year, the deferred tax asset account had a balance of $12 million attributable to a cumulative temporary difference of $30 million in a liability for estimated expenses. Taxable income is $35 million. No temporary differences existed at the beginning of the year, and the tax rate is 40%. Prepare the journal entry(s) to record income taxes assuming it is more likely than not that one-fourth of the deferred tax asset will not ultimately be realized.

please see explanation

Explanation:

The following journal entry shall be booked in respect of income taxes to be recognized in the accounts of the corporation given in the question

                                                       Debit                       Credit

Deferred tax asset                         $12 million

Income taxes expense                   $2 million

($30 million*40%)

Income taxes payable                                                   $14 million

($35 million*40%)

Since, it is probable that the company will not be able to realize the 1/4th of the deferred tax asset which has been recognized by it, therefore the deferred tax asset shall be accordingly reduced  through following journal entry:

                                                              Debit                   Credit

Profit or loss(tax expense)                 $3 million

(12*1/4)

Deferred tax asset                                                           $3 million

1.

Debit Income tax expense 2

Debit Deferred tax asset 12

Credit Income tax payable 142

2.

Debit Income tax expense 3

Credit Valuation allowance—Deferred tax asset 3

Explanation:

Deferred tax asset ($30 × 40%) = $12 million

Income tax payable ($35 × 40%) = $14 million

Valuation allowance – deferred tax asset (1/4 × $12) = $3 million

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