ExpertHard1 markMultiple Choice
CPA · Question 30 · Area 2: Select Accounts
A company has a Deferred Tax Asset (DTA) of $100,000 arising from NOL carryforwards. Management determines it is 'more likely than not' that only 60% of the DTA will be realized. What is the journal entry to record the Valuation Allowance?
A company has a Deferred Tax Asset (DTA) of $100,000 arising from NOL carryforwards. Management determines it is 'more likely than not' that only 60% of the DTA will be realized. What is the journal entry to record the Valuation Allowance?
Answer options:
A.
Dr. Income Tax Expense $60,000; Cr. Valuation Allowance $60,000
B.
Dr. Income Tax Expense $40,000; Cr. Valuation Allowance $40,000
C.
Dr. Valuation Allowance $40,000; Cr. Income Tax Benefit $40,000
D.
No entry needed.
How to approach this question
1. Determine % NOT realized. 2. Calculate Allowance ($ * % Not Realized). 3. Entry: Dr Tax Expense, Cr Valuation Allowance.
Full Answer
B.Dr. Income Tax Expense $40,000; Cr. 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. Unrealized portion = 40%. $100,000 * 40% = $40,000. This increases tax expense.
Common mistakes
Calculating allowance on the realized portion (60%) instead of the unrealized portion (40%).
Practice the full CPA FAR Practice Exam
50 questions · hints · full answers · grading
More questions from this exam
Q1According to the FASB Conceptual Framework, which of the following statements correctly describes...HardQ2On October 1, Year 1, Host Co. committed to a plan to dispose of a major component of its busines...HardQ3A company has a debt covenant requiring a current ratio of at least 2.0. On December 31, Year 1, ...HardQ4Orion Corp. reports under US GAAP. In preparing its statement of cash flows for the year ended De...HardQ5Parent Co. owns 80% of Sub Co. During Year 1, Parent sold inventory to Sub for $500,000. The cost...Hard