Problem 14-53 (LO. 5) LaceCo has adopted certain aggressive policies concerning
ID: 2585208 • Letter: P
Question
Problem 14-53 (LO. 5)
LaceCo has adopted certain aggressive policies concerning its deduction for domestic production activities (DPAD). The entity estimates that it will reduce its Federal income tax liability by $400,000 as a result of these strategies, but that the IRS is likely to challenge the policies in an audit.
LaceCo estimates that the tax benefit may be reduced after an IRS audit and related negotiations (amounts as indicated with related probabilities); LaceCo constructs a table of these probabilities and results.
Resulting Estimated Tax Benefit - Probability of AgreementBetween LaceCo and IRS - Cumulative ProbabilityComputed
$400,000 10% 10%
300,000 35% 45%
250,000 40% 85%
–0– 15% 100%
LaceCo recorded a book-tax provision of $600,000, including the $400,000 tax benefit from this tax uncertainty.
a. Determine the amount that LaceCo should record for the tax benefit from this item, under GAAP rules and ASC 740-10 (FIN 48).
$ ____________
b.
b. Construct the journal entry that LaceCo should record.
JOURNALDATE
Description
Post. Ref.
Debit
Credit Income tax expense (provision) $ ASC 740-10 (FIN 48) liability
Explanation / Answer
Benefit to be recognised is the largest amount with morethan or equal to 50% probability of realising it.
Hence a benefit of 250000 is only should be recognised as it has more than 50% probability of realising.
a. Amount of tax benefit= 250000
b. Since already 400000 benefit is recorded, excess = 400000-250000= 150000 should be expensesd in the books.
Entry:
Account Debit Credit
Income tax expnese 150000
To Income tax liability 150000