Reference no: EM132882521

Question - Ayayai Corp. had a Deferred Tax Asset account with a balance of $109,800 at the end of 2019 due to a single temporary difference of $366,000 related to warranty liability accruals. At the end of 2020, this same temporary difference has increased to $397,000. Taxable income for 2020 is $917,000. The tax rate is 30% for all years.

a. Assuming that it is more likely than not that $26,000 of the deferred tax asset will not be realized, prepare the journal entries to record income taxes for 2020. Ayayai uses a valuation allowance account:

-to record current tax expense

-to record differed tax benefit

-to bring the deferred tax assets

-account to its realizable value

b. In 2021, the company's prospects improved. While there was no change in the temporary deductible differences underlying the Deferred Tax Asset account, it was now considered more likely than not that the company would be able to make full use of the temporary differences. Prepare the entry, if applicable, to adjust the Deferred Tax Asset and related account(s).