Recording Income Tax Expense: Uncertain Tax Position

Randolph Inc. took a recent tax position related to a tax deduction of $750,000 on a research and development project. The company had uncertainty about the classication of some costs associated with the project. Randolph determined that this position is more likely than not to be sustained in any future investigation by taxing authorities. Using available information, Randolph Inc. created the following summary of probabilities of sustaining the tax position.

Possible Estimated Outcome (Allowable Deductible Expense). --------> Probability of Occurring

$750,000. ---------> 15%

600,000 -----------> 25%

540,000 ----------> 40%

300,000 -----------> 10%

240,000 ------------> 10%

Question 1: Assuming taxable income of $3,000,000 (with the research and development tax deduction taken) and a tax rate of 25%, record the income tax journal entry for the year. Assume Randolph has no temporary dierences between GAAP and taxable income.

(3-line entry, to record income tax expense)

Question 2: Next year, assume the full benet is realized, record the journal entry required.

(2-line entry, to record favorable resolution of tax position)

Question 3: Assume instead that next year the full benet is lost, record the journal entry required.

(3-line entry, to record failure to sustain tax position)