In 2012, HD had reported a deferred tax asset of $90 million with no valuation allowance. At December 31, 2013, the account balances of HD Services showed a deferred tax asset of $120 million before assessing the need for a valuation allowance and income taxes payable of $80 million. HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized. HD made no estimated tax payments during 2013. What amount should HD report as income tax expense in its 2013 income statement?

Question

Quizplus · Accepted Answer

HD should report income tax expense based on the amount of deferred tax asset that is expected to be realized, after considering the need for a valuation allowance. Since HD has determined that only 70% (100% - 30%) of the deferred tax asset will be realized, a valuation allowance of $36 million ($120 million x 30%) should be recognized, reducing the net deferred tax asset to $84 million ($120 million - $36 million). Income tax expense should be calculated based on the income tax payable of $80 million and the change in net deferred tax asset of $6 million ($90 million - $84 million). Therefore, the income tax expense for 2013 is $86 million.

In 2012, HD Had Reported a Deferred Tax Asset of $90