Question

Saginaw Inc. completed its first year of operations with a pretax loss of $512,500. The tax return showed a net operating loss of $656,500, which the company will carry forward. The $144,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming the current tax expense is zero and tax rate is 34 percent.

Journal entry worksheet

Record the deferred tax asset for recognition of current year NOL before considering valuation allowance.

Note: Enter debits before credits.

a. Prepare the journal entry to record the deferred tax consequences of the current year NOL before considering the valuation allowance.

Transaction	General Journal	Debit	Credit
1

b. Prepare the journal entry to record the deferred tax consequences of the depreciation book-tax difference.

Journal entry worksheet

Record the deferred tax liability arising from book-tax depreciation difference.

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

c. Prepare the journal entry to record the deferred tax consequences of the valuation allowance.

Journal entry worksheet

Record the valuation allowance.

Note: Enter debits before credits.

Transaction	General Journal	Debit	Credit
1

Answer 1

SOLUTION

S.No.	Accounts title and Explanations	Debit ($)	Credit ($)
1.	Deferred tax asset ($656,500*34%)	223,210
	Deferred tax benefit		223,210
	(To record the deferred tax consequences of the current year NOL )
2.	Deferred tax expense	48,960
	Deferred tax liability ($144,000*34%)		48,960
	(To record the deferred tax consequences of the depreciation book-tax difference )
3.	Deferred tax benefit	174,250
	Valuation allowance ($$656,500 - $144,000) *34%		174,250
	(To record the valuation allowance)