Question

NovaSci, Inc. has a deferred tax asset account with a balance of $255,000 at the end of 2013 due to a single cumulative temporary difference of $850,000.

At the end of 2014 this same temporary difference has decreased to a cumulative amount of $750,000.

Taxable income for 2014 is $650,000. The tax rate is 30% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2013.

(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming that it is more likely than not that the deferred tax asset will be realized. (b) Assuming that it is more likely than not that one-half of the total deferred tax asset will not be realized, prepare the journal entry at the end of 2014 to record the valuation account.

Answer 1

Journal Enty
S. no.	Account Titles	Debit	Credit
a.	Income Tax expense	$225,000
	Deferred Tax Asset {30% *(850000-750000)}		$30,000
	Tax payable ($650000*30%)		$195,000
	To Record Reduction in DTA and Tax Expense
b.	Valuation Account	$112,500
	Deffered Tax Asset ($750000*0.50*30%)		$112,500
	To Record reduction in DTA to expected realizable Value, due to non-realisation of DTA