EXAMLB d Answer the ending balance of the deferred tax asset

EXAMLB (d) Answer the ending balance of the deferred tax asset (or liability) at the end of 2015 Problem 2-2 (10 pts) Emmett Company has a deferred tax asset of $1.0 from the recording of th company\'s CPA has asked management whether a valuation allowance should be recorded to reduce the deferred tax asset to zero 0,000 at December 31, 2018, This amount arises e company\'s liability for postretirement benefits other than pensions. The Required: (a) Why would Emmett not want to report a valuation allowance? (b) Assume that the company determines that a valuation allowance of $400,000 is required How would the company have arrived at this determination, and what effect will it have on net income for fiscal 2018? In 2019, if Emmett will decide to release the valuation allowance recognized in prepare the journal entry regarding the valuation account for 2019 2018,

Solution

(a) Why would Emmett not want to report a valuation allowance?

Emmett do not want to report valuation allowance because it would reduce assets and also increases income tax expense.

(b) Assume that the company determines that a valuation allowance of $400,000 is required. How would the company have arrived at this determination, and what effect will it have on net income for fiscal 2018?

The valuation allowance is called for when “it is not more likely than not” that all of the deferred tax asset will be realized.

The company would apply the procedures and analysis described above and come to a judge regarding the realizability of the deferred tax asset.

When the valuation allowance is recorded to reduce the carrying value of the deferred tax asset, it causes income tax expense in the current period to increase by this amount, and therefore net income to decrease by the same amount.

(c) In 2019, if Emmett will decide to release the valuation allowance recognized in 2018, prepare the journal entry regarding the valuation account for 2019.

Deferred income tax asset         $1,000,000

To Valuation Allowances                       $400,000

To Income Tax Benefit - Deferred         $600,000

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