In the current year, Kappa Corporation earned $1 million of net income before federal income taxes. This amount of book income includes a $100,000 expense for what the company considers an ordinary and necessary business expense. Kappa also deducted the entire $100,000 for tax purposes. In assessing the expense for its tax provision, Kappa determines that it has a more-likely-than-not probability of sustaining some portion of the deduction upon an IRS examination. However, some uncertainty remains as to whether the entire amount is deductible. Any amount ultimately disallowed by the IRS would be a permanent disallowance and not merely a temporary item that could be amortized over time. Upon further analysis, Kappa measures the benefit that is more than 50% likely to be realized as $70,000. Thus, Kappa may not recognize $30,000 of the expense in determining its federal income tax provision. In addition, Kappa has a $25,000 temporary difference that decreases its taxable income to $975,000 and increases its deferred tax liability.
Required:
a. Determine Kappa’s liability for unrecognized tax benefits, total federal income tax expense, deferred federal income tax expense, current federal income tax expense, increase in deferred tax liability, and federal income taxes payable.
b. Prepare the journal entry necessary to record the current year tax provision.