ExpertMedium1 markMultiple Choice
CPA · Question 49 · Area II: Technical Accounting
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?
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:
A.
Debit Retained Earnings $40,000; Credit DTA $40,000
B.
Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000
C.
Debit Valuation Allowance $40,000; Credit Income Tax Benefit $40,000
D.
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
B
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.
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