Brandon
Corp. had a future tax asset account with a balance of $101,500 at the end of
2010 due to a single temporary difference of $290,000 related to warranty
liability accruals. At the end of 2011, this same temporary difference has
increased to $315,000. Taxable income for 2011 is $887,000. The tax rate is 35%
for all years.
Instructions
(a)
Calculate and record income taxes for 2011, assuming that it is more likely
than not that the future tax asset will be realized.
(b)
1. Assuming it is more likely than not that $25,000 of the future tax asset
will not be realized, prepare the journal entries to record income taxes for
2011. Brandon does not use a valuation allowance account.
2.
In 2012, prospects for the company improved. While there was no change in the
temporary deductible differences underlying the future tax asset account, it
was now considered more likely than not that the company would be able to make
full use of the temporary differences. Prepare the entry, if applicable, to
adjust the future tax asset account.
(a) Current
Income Tax Expense.......... 310,450
Income
Tax Payable.............. 310,450
Taxable
income $887,000
Enacted tax
rate X 35%
Income tax
payable $310,450
Balance
|
|
Deductible
|
|
|
|
|
|
|
|
Sheet
|
|
Temporary
|
|
|
Tax
|
|
Future Tax
|
|
|
Account
|
|
Differences
|
|
X
|
Rate
|
|
Asset
|
|
|
Warranty
Liabilities
|
|
$315,000*
|
|
|
35%
|
|
$110,250
|
|
|
|
|
|
|
|
|
|
|
|
Future income tax asset, Dec. 31, 2011 110,250
Future income tax asset before adjustment 101,500
Incr. in future income tax asset and future
income tax
benefit for 2011 $8,750
* Carrying amount and
tax basis are not given in the exercise, only the net difference
Future
Income Tax Asset............. 8,750
Future
Income Tax Benefit....... 8,750
(b) (1.)
2011
Current
Income Tax Expense.......... 310,450
Income
Tax Payable.............. 310,450
Balance
|
|
Deductible
|
|
|
|
|
|
|
|
Sheet
|
|
Temporary
|
|
|
Tax
|
|
Future Tax
|
|
|
Account
|
|
Differences
|
|
X
|
Rate
|
|
Asset
|
|
|
Warranty
Liabilities
|
|
$315,000*
|
|
|
35%
|
|
$110,250
|
|
Less amount not likely to be realized
(25,000)
Future income tax asset, Dec. 31, 2011 85,250
Future income tax asset before adjustment 101,500
Decr. in future income tax asset and future
income tax
expense for 2011 ($16,250)
* Carrying amount and
tax basis are not given in the exercise, only the net difference
Future
Income Tax Expense........... 16,250
Future
Income Tax Asset......... 16,250
(b) (2.)
2012
Future
Income Tax Asset............. 25,000
Future
Income Tax Benefit....... 25,000
