JuarezCo constructs the following table in determining how to apply ASC 740-10 to its filing position for its domestic production activities deduction. Its book-tax provision for the year, including $3 million for the uncertain transfer pricing issue, is $10 million. $$\begin{array} { c c c }
\begin{array} { c }
\text { Resulting Estimated Tax } \
\text { Benefit }
\end{array} & \begin{array} { c }
\text { Probability of Agreement between } \
\text { JuarezCo and IRS }
\end{array} & \begin{array} { c }
\text { Cumulative Probability of } \
\text { Agreement }
\end{array} \
\text { \$3 million } & 10 \% & 10 \% \
\text { \$2 million } & 45 \% & 55 \% \
\text { \$1.6 million } & 40 \% & 95 \% \
\text { \$1.1 million } & 5 \% & 100 \%
\end{array}$$ Under ASC 740-10, JuarezCo's book income tax expense for this item is:
A) $13 million.
B) $12 million.
C) $11.4 million.
D) $11 million.

Question

JuarezCo constructs the following table in determining how to apply ASC 740-10 to its filing position for its domestic production activities deduction. Its book-tax provision for the year, including $3 million for the uncertain transfer pricing issue, is $10 million. $$\begin{array} { c c c } 
\begin{array} { c } 
\text { Resulting Estimated Tax } \
\text { Benefit }
\end{array} & \begin{array} { c } 
\text { Probability of Agreement between } \
\text { JuarezCo and IRS }
\end{array} & \begin{array} { c } 
\text { Cumulative Probability of } \
\text { Agreement }
\end{array} \
\text { \$3 million } & 10 \% & 10 \% \
\text { \$2 million } & 45 \% & 55 \% \
\text { \$1.6 million } & 40 \% & 95 \% \
\text { \$1.1 million } & 5 \% & 100 \%
\end{array}$$ Under ASC 740-10, JuarezCo's book income tax expense for this item is:
A) $13 million.
B) $12 million.
C) $11.4 million.
D) $11 million.

Quizplus · Accepted Answer

The correct answer is D because the book income tax expense is the sum of the expected tax benefits multiplied by their respective probabilities. The expected tax benefit for each outcome is the product of the resulting estimated tax benefit and the probability of agreement between JuarezCo and the IRS. The cumulative probability of agreement is the sum of the probabilities of agreement for all outcomes up to and including the current outcome. The expected tax benefit for the $3 million outcome is $3 million * 10% = $300,000. The expected tax benefit for the $2 million outcome is $2 million * 45% = $900,000. The expected tax benefit for the $1.6 million outcome is $1.6 million * 40% = $640,000. The expected tax benefit for the $1.1 million outcome is $1.1 million * 5% = $55,000. The total expected tax benefit is $300,000 + $900,000 + $640,000 + $55,000 = $1,900,000. The book income tax expense is $10,000,000 + $1,900,000 = $11,900,000.

JuarezCo Constructs the Following Table in Determining How to Apply