[Solution] Entry Phillips Would Make
In 20X1, Phillips Company reported $10,000,000 of pre-tax book income and also had $10,000,000 of taxable income. It incurred a $1,000,000 book expense that it deducted on its tax return. Assuming a 2
In 20X1, Phillips Company reported $10,000,000 of pre-tax book income and also had $10,000,000 of taxable income. It incurred a $1,000,000 book expense that it deducted on its tax return. Assuming a 21% tax rate, this deduction results in a $210,000 tax benefit. The tax law was unclear at that time whether this expense was deductible, so it led to an uncertain tax position.
As of December 31, 20X1, this uncertain tax position had a 60% likelihood of being sustained based on technical merits, $90,000 of the benefit was recognized, and a tax contingency reserve of $120,000 was created for this position.
A court decision in 20X2 lowered the likelihood that this uncertain tax position would be sustained on technical merits to 40% and led to the following amounts and related individual probabilities of possible outcomes as of December 31, 20X2:
10% likelihood of realizing $210,000
15% likelihood of realizing $150,000
30% likelihood of realizing $30,000
45% likelihood of realizing $0
- Based on these facts, provide the journal entry that Phillips would make in 20X1 to record its income tax activity, including the tax contingency for unrecognized tax benefits.
- Provide the entry Phillips would make in 20X2 to record any change in the status of the tax contingency reserve.