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 $15 million (direct reduction in taxespayable) and has determined that its sustainability is â€œmore likelythan not,â€ based on its technical merits. Delta has developed theprobability table shown below of all possible materialoutcomes:
Probability Table ($ in millions)
Amount of the tax benefit that management expects toreceive $ 15 $ 12.0 $ 9.0 $ 6.0 $ 3.0
Percentage likelihood that the tax benefit will be sustained atthis level 10 % 20 % 25 % 20 % 25 %
Deltaâ€™s taxable income is $90 million for the year. Itseffective tax rate is 40%. The tax credit would be a directreduction in current 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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Solution Tax benefit of a position taken by a company in its return should be recognized by it in its financial statement only if it is more likely than not that the company will be able to sustain its tax return position based on its technical merits Once the more likely than not criterion is met the amount of tax benefit to be recognized in the financial statement should be measured as the largest amount of benefit that has a cumulative probability of greater than 50 of being realized 1 Using the probability table given in the question the See Answer

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Probability Table ($ in millions)
Amount of the tax benefit that management expects toreceive	$	15		$	12.0		$	9.0		$	6.0		$	3.0
Percentage likelihood that the tax benefit will be sustained atthis level		10	%		20	%		25	%		20	%		25	%