Prepare journal entries to account for income taxes

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Reference no: EM1378117

Updike and Patterson Investments Inc. (UPI) hold equity investments with a cost basis of $250,000. UPI accounts for these investments as available-for-sale securities. As such, the investments are carried on balance sheet at fair value with unrealized gains and losses reported in other comprehensive income. At the end of Year 1, the fair value of these investments has declined to $220000. Therefore UPI reports an unrealized loss for financial reporting purposes of $30,000 in other comprehensive income which creates a temporary tax difference. As of 31st December, Year 1, UPI management evaluate that it is more likely than not that the company will be able to deduct capital losses on these investments for tax purposes if they are realized. As of 31st December, Year 2, UPI management evaluates its assessment of tax position and determines that it is more likely than not that the company will not be able to take a deduction for any capital loss on these investments. UPI's tax rate is 40 percent.

Required: Prepare Journal Entries to account for income taxes in Year 1 and Year 2.

Reference no: EM1378117

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