A company has a deferred tax asset (DTA) of $100,000. Management determines that it is more likely than not that $40,000 of the DTA will not be realized due to insufficient future taxable income. What is the appropriate accounting entry?

Answer options:

Debit Retained Earnings $40,000; Credit DTA $40,000

Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000

Debit Valuation Allowance $40,000; Credit Income Tax Benefit $40,000

Debit Impairment Loss $40,000; Credit DTA $40,000

How to approach this question

DTA Valuation Allowance logic: If 'more likely than not' that DTA won't be used -> Create Valuation Allowance (Credit). Debit Tax Expense.

Full Answer

B.Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000✓ Correct

A valuation allowance is established when it is more likely than not that some portion of the DTA will not be realized. The entry increases Income Tax Expense and increases the Valuation Allowance (a contra-asset to DTA).

Common mistakes

Directly crediting DTA; debiting OCI or RE.

Question 48 All questions Question 50

Practice the full CPA BAR Practice Exam 3

50 questions · hints · full answers · grading

More questions from this exam

Q01Orion Manufacturing provides the following financial data for the current year:<br/><br/>- Net Sa...Hard Q02A manufacturing company uses a standard cost system. For the month of June, the following data is...Medium Q03A financial analyst is reviewing a company's sales data using a visualization tool. The scatter p...Medium Q04TechStart Inc. reports Net Income of $500,000. The income statement includes:<br/>- Depreciation ...Medium Q05A company produces two products, A and B. Under its traditional costing method, the company alloc...Medium

View all 50 questions →