Brandon Corp. had a future tax asset account with a balance of $101,500 at the end of 2010 due to a single temporary difference of $290,000 related to warranty liability accruals. At the end of 2011, this same temporary difference has increased to $315,000. Taxable income for 2011 is $887,000. The tax rate is 35% for all years.
Instructions
(a) Calculate and record income taxes for 2011, assuming that it is more likely than not that the future tax asset will be realized.
(b) 1. Assuming it is more likely than not that $25,000 of the future tax asset will not be realized, prepare the journal entries to record income taxes for 2011. Brandon does not use a valuation allowance account.
2. In 2012, prospects for the company improved. While there was no change in the temporary deductible differences underlying the future tax asset account, it was now considered more likely than not that the company would be able to make full use of the temporary differences. Prepare the entry, if applicable, to adjust the future tax asset account.