At the end of the preceding year, World Industries had a deferred tax asset of $
ID: 2422086 • Letter: A
Question
At the end of the preceding year, World Industries had a deferred tax asset of $14,000,000, attributable to its only temporary difference of $43,000,000 for estimated expenses. At the end of the current year, the temporary difference is $38,000,000. 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 $11,300,000 for the current year and the tax rate is 30% for all years.
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.)
Record the income taxes.
Record valuation allowance for the year end.
At the end of the preceding year, World Industries had a deferred tax asset of $14,000,000, attributable to its only temporary difference of $43,000,000 for estimated expenses. At the end of the current year, the temporary difference is $38,000,000. 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 $11,300,000 for the current year and the tax rate is 30% for all years.
Explanation / Answer
Year End Tempropary difference is $38000000/- the deferred tax assets provision is @30% therefore the deffered tax assets created $11400000 (38000000*30%).
Now the deferred tax assets at the year end 14000000+11400000= $25400000.
Deferred Tax Assets A/c Dr 11400000
To Profit & Loss Account 11400000
Taxable Income $11300000 therefore tax @30% is 3390000.
Profit & Loss account Dr 3390000
To Income Tax expenses 3390000
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