LaceCo has adopted certain aggressive policies concerning its deduction for dome

Question

LaceCo has adopted certain aggressive policies concerning its deduction for domestic production activities (DPAD). The entity estimates that it will reduce its federal income tax liability by $400,000 as a result of these strategies but that the IRS is likely to challenge the policies in an audit. LaceCo estimates that the tax benefit may be reduced after an IRS audit and related negotiations ( amounts as indicated with related probabilities); LaceCo constructs a table of these probabilities and results

Resulting Est Tax Benefit    Probability of agreement between Lacco and IRS    Cumulative Probability Computed

$400,000    10%    10%

300,000 35%    45%

250,000 40%    85%

-0- 15% 100%

LaceCo recorded a book-tax provision of $600,000, including the $400,000 tax benefit from this tax uncertainty

A) Determine the amount that LaceCo should record for the tax benefit from this item, under GAAP rules and ASC 740-10 (FIN 48)

B) Construct the journal entry that LaceCo should record

Explanation / Answer

A) As per the Rules and ASC 740-10 (FIN 48), LaceCo should record the tax benefit which is most likely to occur. In the above case most like probability is 250,000 benefit as it construct 40% probability. Hence only 250,000 benefit should record.

B) Journal Entry

Particulars                                                             Debit            Credit

Tax Expense                     a/c               Dr.             7,50,000

To Provision for tax                                                                  7,50,000

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