Cullumber Corp. has a deferred tax asset account with a balance of $134,800 at the end of 2016 due to a single cumulative temporary difference of $337,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $459,000. Taxable income for 2017 is $848,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016. (a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit (b) Assuming that it is more likely than not that $31,300 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit Click if you would like to Show Work for this question: Open Show Work

Question:

Cullumber Corp. has a deferred tax asset account with a balance of $134,800 at the end of 2016 due to a single cumulative temporary difference of $337,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $459,000. Taxable income for 2017 is $848,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016.

(a) Record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized.

(b) Assuming that it is more likely than not that $31,300 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2017 to record the valuation account.

P:S

Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit

Answer and Explanation

a.

Income tax payable = $848,000 x 40% = $339,200.

Income tax expense: because same tax rates and no permanent differences, can use book income x tax rate.

In 2016, there was a cumulative temporary difference (i.e., difference between book and tax income) of $337,000. This difference created a deferred tax asset. A DTA means that in the future, B > T, but in 2016, B < T. Therefore, in 2016, taxable income was greater than book income by $337,000.

Now in 2017, this cumulative difference has increased to $459,000. That means a $122,000 increase occurred in 2017.

Therefore in 2017, taxable income was greater than book income by $122,000.

So, book income must be $848,000 – $122,000 = $726,000.

Income tax expense = $726,000 x 40% = $290,400.

Deferred Tax Asset (DTA):

Balance needs to be total difference * tax rate.

= $459,000 x 40%

= $138,600.

Current balance = $134,800.

DTA needs a $3,800 increase.

ENTRY:

Income tax expense $290,000

DTA $3,800

Income tax payable $339,200

(b)

The entry above would still be done, but the following would also be necessary:

Income Tax Expense$31,300

Allowance to Reduce Deferred Tax Asset to Expected Realizable Value $31,300

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