Answer:
$35 million
Explanation:
First, there is one typographical in the narration of the question in the last paragraph. The correct year is 2018 not 2013. Therefore, the correct full question is as follows:
At December 31, 2018, the account balances of Dowling, Inc. showed income taxes payable of $38 million and a current deferred tax asset of $60 million before assessing the need for a valuation allowance. The previous year Dowling had reported a current deferred tax asset of $45 million with no valuation allowance. Dowling determined that it was more likely than not that 20% of the deferred tax asset ultimately would not be realized. Dowling made no estimated tax payments during 2018.
(a) What amount should Dowling report as total income tax expense in its 2018 income statement?
Answer and explanation:
From the question, we can obtain the following:
Income taxes payable = $38 million
Deferred tax assets balance = $60 million - $45 million = $15 million
Deferred tax assets valuation allowance = $60 million × 20% = $12 million
Therefore, we can obtain the difference that will be the tax expense for 2018 by posting the journal entries as follows:
DR ($'million) CR ($'million)
Deferred tax assets 15
Tax expense (Difference) 35
Tax Payable 38
Valuation allowance 12
From journal, it can be seen that the difference in the entries is $35 million, and that is the tax expense for 2018.
Therefore, Dowling should report $35 million as total income tax expense in its 2018 income statement.
