At the End of the Prior Year, Doubtful Inc

question 54

Essay

At the end of the prior year, Doubtful Inc. had a deferred tax asset of $20,000,000 attributable to its only timing difference, a temporary difference of $50,000,000 in a liability for estimated expenses. At that time, a valuation allowance of $4,000,000 was established. At the end of the current year, the temporary difference is $45,000,000, and Doubtful determines that the balance in the valuation account should now be $5,000,000. Taxable income is $15,000,000 and the tax rate is 40% for all years.
Required:
Prepare journal entries to record Doubtful's income tax expense for the current year. Show well-labeled supporting computations for the income tax payable, the valuation allowance, and the change in the deferred tax asset account.

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Definitions:

Circumstantial Groups

Groups formed due to external situations or conditions rather than shared interests or goals.

Bystanders

Individuals who are present at an event or incident but do not take an active role in its outcome.

Noninterdependence

A situation or relationship where the actions, decisions, or states of one entity do not significantly affect another.

Interdependence

A mutual reliance between individuals or groups, where actions, decisions, or outcomes are influenced by others within a relationship or system.