Delta Catfish Company has taken a position in its tax return to claim a tax credit...

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Accounting

Delta Catfish Company has taken a position in its tax return toclaim a tax credit of $18 million (direct reduction in taxespayable) and has determined that its sustainability is “more likelythan not,” based on its technical merits. Delta has developed theprobability table shown below of all possible materialoutcomes:
Probability Table ($ in millions)
Amount of the tax benefit that management expects toreceive $ 18 $ 14.4 $ 10.8 $ 7.2 $ 3.6
Percentage likelihood that the tax benefit will be sustained atthis level 10 % 20 % 25 % 20 % 25 %

Delta’s taxable income is $93 million for the year. Its effectivetax rate is 40%. The tax credit would be a direct reduction incurrent taxes payable.

Required:
1. At what amount would Delta measure the taxbenefit in its income statement?
2. Prepare the appropriate journal entry for Deltato record its income taxes for the year.

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4.0 Ratings (522 Votes)

The chances of tax deduction of 18 mn being sustained is more likely than not which means more than 50 probability of the tax position being upheld As per ASC 740 the threshold for recognizing the benefits of uncertain tax returns positions as more likely than notie 50 So in this case threshold is met See Answer

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Probability Table ($ in millions)
Amount of the tax benefit that management expects toreceive	$	18		$	14.4		$	10.8		$	7.2		$	3.6
Percentage likelihood that the tax benefit will be sustained atthis level		10	%		20	%		25	%		20	%		25	%