Saginaw Inc. completed its first year of operations with a pretax loss of $742,500. The tax return showed a net operating loss of $896,500 that the company will carry forward. The $154,000 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. Assume the current tax expense is zero. b. Prepare the journal entry to record the deferred tax consequences for recognition of the current year NOL before considering the valuation allowance. C prepare the journal entry to record deferred tax consequences of valuation allowance D prepare the journal entry to record deferred tax consequences of depreciation book-tax differences
Question
Saginaw Inc. completed its first year of operations with a pretax loss of 896,500 that the company will carry forward. The $154,000 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. Assume the current tax expense is zero. b. Prepare the journal entry to record the deferred tax consequences for recognition of the current year NOL before considering the valuation allowance. C prepare the journal entry to record deferred tax consequences of valuation allowance D prepare the journal entry to record deferred tax consequences of depreciation book-tax differences
Solution
b. To record the deferred tax consequences for recognition of the current year NOL before considering the valuation allowance, the journal entry would be:
Debit: Deferred Tax Asset 896,500
This entry recognizes the tax benefit that the company will receive in future years due to the net operating loss carryforward.
c. To record the deferred tax consequences of the valuation allowance, the journal entry would be:
Debit: Valuation Allowance 896,500
This entry reduces the deferred tax asset by the amount of the valuation allowance, as management has determined that it is more likely than not that some portion or all of the deferred tax asset will not be realized.
d. To record the deferred tax consequences of the depreciation book-tax differences, the journal entry would be:
Debit: Deferred Tax Liability 154,000
This entry recognizes the future tax liability that will arise due to the difference between book and tax depreciation.
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