ExpertMedium1 markMultiple Choice
CPA · Question 42 · Area III: Select Transactions
At the end of Year 1, a company has a Deferred Tax Asset (DTA) of $100,000. Management determines that it is 'more likely than not' that only $60,000 of the DTA will be realized. What journal entry is required?
At the end of Year 1, a company has a Deferred Tax Asset (DTA) of $100,000. Management determines that it is 'more likely than not' that only $60,000 of the DTA will be realized. What journal entry is required?
Answer options:
A.
Debit Income Tax Expense $60,000; Credit Valuation Allowance $60,000
B.
Debit Deferred Tax Asset $40,000; Credit Income Tax Benefit $40,000
C.
Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000
D.
Debit Valuation Allowance $40,000; Credit Income Tax Benefit $40,000
How to approach this question
Valuation Allowance is a contra-asset to DTA. <br/>Target Net DTA = $60k. Gross DTA = $100k. <br/>Required Allowance = $40k. <br/>Entry: Dr Tax Expense, Cr Valuation Allowance.
Full Answer
C.Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000✓ Correct
A valuation allowance is recognized if it is more likely than not that some portion of the DTA will not be realized. <br/>Unrealizable portion = $100,000 - $60,000 = $40,000. <br/>Entry: Debit Income Tax Expense, Credit Valuation Allowance for Deferred Tax Asset.
Common mistakes
Recording the allowance for the realizable amount ($60k) instead of the unrealizable amount ($40k).
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