SHOW CALCUALTIONS E19-14B (Deferred Tax Asset with and without Valuation Account

ID: 2445317 • Letter: S

Question

SHOW CALCUALTIONS

E19-14B (Deferred Tax Asset with and without Valuation Account) 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.

Instructions SHOW CALCULATIONS

(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 deferred tax asset will not be realized,

prepare the journal entry at the end of 2014 to record the valuation account.

Temporary Difference in 2014 = 75000

Deferred Tax Asset = 750000*0.30 = 225000

Taxable income = 650000

Income Tax payable = 650000*30% = 195000

Income Tax Expense = Income Tax payable + Change in Deferred Tax Liablity - Change in Deferred Tax Asset

= 195000 + 0 - (225000 -255000)

= 225000

Here , it is assumed that the entire Deferred tax asset can be realised as sufficient future taxable income shall be available

(B)

When, more that 1/2of the asset is not realizable,

DTA = (750000*0.50)*30% = 112500

So, Income Tax Payable = 195000 +0- (1125000-25500) = 307500

In this case , a valuation account is prepared

Valuation Account Dr 112500

To Deferred Tax Asset 112500

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