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:

Debit Income Tax Expense $100,000; Credit Valuation Allowance $100,000

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

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

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.

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

The Valuation Allowance reduces the DTA to the amount expected to be realized. The offset is to Income Tax Expense (Deferred).

Recording allowance for the realized portion instead of unrealized.

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