ExpertMedium1 markMultiple Choice
CPA · Question 28 · Area III: Select Transactions
A company has a deferred tax asset of $40,000 at year-end. Management determines that it is more likely than not that only $30,000 of the asset will be realized. <br/><br/>What is the journal entry to record the valuation allowance?
A company has a deferred tax asset of $40,000 at year-end. Management determines that it is more likely than not that only $30,000 of the asset will be realized. <br/><br/>What is the journal entry to record the valuation allowance?
Answer options:
A.
Debit Valuation Allowance $10,000; Credit Income Tax Expense $10,000
B.
Debit Income Tax Expense $30,000; Credit Valuation Allowance $30,000
C.
Debit Income Tax Expense $10,000; Credit Valuation Allowance $10,000
D.
Debit Deferred Tax Asset $10,000; Credit Valuation Allowance $10,000
How to approach this question
Valuation Allowance is a contra-asset (Credit balance). It reduces the DTA to the realizable amount. The offset is Income Tax Expense.
Full Answer
C.Debit Income Tax Expense $10,000; Credit Valuation Allowance $10,000✓ Correct
C
Unrealizable portion = $40,000 - $30,000 = $10,000. <br/>Entry: Dr Income Tax Expense $10,000; Cr Valuation Allowance for DTA $10,000.
Common mistakes
Recording allowance for the realizable amount instead of the unrealizable amount.
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