Question

Callaway Corp. has a deferred tax asset account with a balance of \(150,000 at the end of 2017 due to a single cumulative temporary difference of \)375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of \(500,000. Taxable income for 2018 is \)850,000. The tax rate is 40% for all years.

Instructions

(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.

(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Short answer

a) Income tax expense is debited $290,000, deferred tax asset is debited by $50,000 and income tax payable is credited by $340,000

b) Income tax expense is debited, and deferred tax asset is credited by $30,000, respectively.

Step-by-step solution

Meaning of Income-tax.

A business's tax responsibility to the government in which it operates is known as "income tax payable."

(a) Preparing journal entries.

Date	Particulars	Debit ($)	Credit ($)
	Income tax expense	290,000
	Deferred tax asset	50,000
	Income tax payable		340,000

Working notes:

Calculation of income tax payable

$\begin{array}{c}\mathbf{Income}\mathbf{tax}\mathbf{payable}\mathbf{=}\mathbf{Taxable}\mathbf{income}\mathbf{\times }\mathbf{Enacted}\mathbf{tax}\mathbf{rate}\\ =\$850,000\times 40\%\\ =\$340,000\end{array}$

Deferred Tax
Date	Cumulative future taxable (Deductible) amount	Taxrate	(Asset)	Liability
12/31/18	$(500,000)	40%	$(200,000)
Deferred tax asset at the end of 2018				$200,000
Deferred tax asset at the beginning of 2018				150,000
Deferred tax benefit for 2018 (increase in deferred tax asset)				(50,000)
Current tax expense for 2018 (Income taxes payable)				340,000
Income tax expense for 2018				$290,000

 Step 3: (b) Preparing journal entries.

Date	Particulars	Debit ($)	Credit ($)
	Income Tax Expense	30,000
	Deferred Tax Asset		30,000