Question

Saginaw Inc. completed its first year of operations with a pretax loss of $500,000. The tax return showed a net operating loss of $600,000, which the company will carry forward. The $100,000 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 , prepare the journal entries to record the deferred tax provision and the valuation allowance.

1. prepare the journal entry to record the deferred tax consequences for recognition of the current year NOL before considering the valuation allowance.

2. prepare the journal entry to record the deferred tax consequences of the depreciation book-tax difference .

3. prepare the journal entry to record the deferred tax consequences of the valuation allowance.

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

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

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

Answer 1

NOTE : TAX RATE ASSUMED TO BE 34%

SOLUTION:

Sr no.	Account title and explanation	debit	credit
1	deferred tax asset ($600000×34%)	$204000
	Deferred tax benefit		$204000
	(To record deferred tax consequence of current year NOL)
2.	Deferred tax expense ($100000×34%)	$34000
	Deferred tax liability		$34000
	(To record deferred tax consequence of depreciation)
3.	Deferred tax benefit [($600000-$100000)×34%]	$175000
	Valuation allowance		$175000
	(To record deffered tax consequence of valuation allowance)

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