ExpertMedium1 markMultiple Choice
CPA · Question 42 · Area III: Select Transactions
A company has a Deferred Tax Asset of $100,000. Management determines it is 'more likely than not' that $40,000 of the DTA will not be realized. What is the journal entry to record the valuation allowance?
A company has a Deferred Tax Asset of $100,000. Management determines it is 'more likely than not' that $40,000 of the DTA will not be realized. What is the journal entry to record the valuation allowance?
Answer options:
A.
Debit Income Tax Expense $100,000; Credit Valuation Allowance $100,000
B.
Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000
C.
Debit Valuation Allowance $40,000; Credit Income Tax Expense $40,000
D.
Debit OCI $40,000; Credit Valuation Allowance $40,000
How to approach this question
Valuation Allowance is a contra-asset to DTA. Increasing it increases Tax Expense. Amount is the portion NOT likely to be realized.
Full Answer
B.Debit Income Tax Expense $40,000; Credit Valuation Allowance $40,000✓ Correct
B
The Valuation Allowance reduces the DTA to the amount expected to be realized. The offset is to Income Tax Expense (Deferred).
Common mistakes
Recording allowance for the realized portion instead of unrealized.
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