[Anonymous]

On its December 31, 20X1, balance sheet, Shin Co. had income taxes payable of $13,000 and a current deferred tax asset of $20,000 before determining the need for a valuation account. Shin had reported a current deferred tax asset of $15,000 at December 31, 20X0. No estimated tax payments were made during 20X1. At December 31, 20X1, Shin determined that it was likely that 10% of the deferred tax asset would not be realized. In its 20X1 income statement, what amount should Shin report as total income tax expense?

A. $8,000

B. $8,500

Correct C. $10,000

D. $13,000

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Income taxes payable $13,000

Less net deferred tax asset

((0.90 x $20,000) – $15,000) = (3,000)

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Total income tax expense $10,000

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Why subtract the prior year’s DTA of 15,000 with the current year’s DTA (less then 10%) of 18,000?

[linxia_sharlene]

net deferred tax asset = deferred tax asset that is more likely than not to be realized.

[Missy]

Because what hits you income statement in a given year only reflects changes that happened between the first day of the year and the last day of the year. Your DTA started at 15k and ended at 18k (after the entry for 10%) so the difference, 3k increase in DTA reduces your expense by the same.

In other words that 15k already reduced expense in previous years and has to be subtracted as not to double dip.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[inviteyou]

I know this is an old post but it's possible it may help someone in the future. I finally figured this out by doing JE's…
First I populated everything that the problem provided and then just plugged in.

We know from the problem:
DR Deferred Tax Asset 5,000 (this is the increase that occurred from 12.31.x4 to 12.31.x5)
CR Income Tax Expense 5,000 (which is the other side of the DTA entry)

DR Income Tax Expense 2,000
CR Valuation Account 2,000 (this is the 10% of the Current DTA that will not be realized 20,000 x 10%)

Combine the above with income taxes payable we get:
DR Plug – Income Tax Expense 13,000
DR Income Tax Expense 2,000
DR Deferred Tax Asset 5,000
CR Income Tax Expense 5,000
CR Income Taxes Payable 13,000
CR Valuation Account 2,000

So the plug is 13,000 for Income Tax Expense. Now, when I do T account to calculate the Income Tax Expense, I get 13,000 + 2,000 MINUS 5,000, I get 10,000 as the income tax expense. The current DTA of 5,000 reduces the current tax expense.

[Author]

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