XYZ, Inc. reports taxable income of $200,000 for 2008 and has a 30% marginal tax rate. The tax rate is expected to increase to 40% next year and remain at 40% for the foreseeable future. Excluded from the determination of taxable income was a questionable deduction of $20,000 which represented an uncertain tax position (note, taxable income would have been $220,000 if the deduction had not been taken). Despite this uncertainty, XYZ, Inc. records the deduction, and they do feel the deduction satisfies the “more likely than not” criteria. They further anticipate the following probabilities of different outcomes with the IRS: Allowable Deduction Probability $15,000 30% $12,000 25% $10,000 20% $5,000 15% $0 10% What is the journal entry that XYZ, Inc. will record to account for this uncertain tax position? If XYZ, Inc. is audited in 2009 and the IRS determines that only $14,000 of the deduction was allowed, what would the journal entry be to record the additional taxes due (ignore interest and penalties)?
XYZ, Inc. reports taxable income of $200,000 for 2008 and has a 30% marginal tax rate. The tax rate is expected to increase to 40% next year and remain at 40% for the foreseeable future. Excluded from the determination of taxable income was a questionable deduction of $20,000 which represented an uncertain tax position (note, taxable income would have been $220,000 if the deduction had not been taken). Despite this uncertainty, XYZ, Inc. records the deduction, and they do feel the deduction satisfies the “more likely than not” criteria. They further anticipate the following probabilities of different outcomes with the IRS: Allowable Deduction Probability $15,000 30% $12,000 25% $10,000 20% $5,000 15% $0 10% What is the journal entry that XYZ, Inc. will record to account for this uncertain tax position? If XYZ, Inc. is audited in 2009 and the IRS determines that only $14,000 of the deduction was allowed, what would the journal entry be to record the additional taxes due (ignore interest and penalties)?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
XYZ, Inc. reports taxable income of $200,000 for 2008 and has a 30% marginal tax rate. The tax rate is expected to increase to 40% next year and remain at 40% for the foreseeable future. Excluded from the determination of taxable income was a questionable deduction of $20,000 which represented an uncertain tax position (note, taxable income would have been $220,000 if the deduction had not been taken). Despite this uncertainty, XYZ, Inc. records the deduction, and they do feel the deduction satisfies the “more likely than not” criteria. They further anticipate the following probabilities of different outcomes with the IRS:
Allowable Deduction
Probability
$15,000 30%
$12,000 25%
$10,000 20%
$5,000 15%
$0 10%
What is the journal entry that XYZ, Inc. will record to account for this uncertain
tax position?
If XYZ, Inc. is audited in 2009 and the IRS determines that only $14,000 of the deduction was allowed, what would the journal entry be to record the additional taxes due (ignore interest and penalties)?
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