A company has a deferred tax asset of $40,000 at year-end. Management determines that it is more likely than not that only $30,000 of the asset will be realized. <br/><br/>What is the journal entry to record the valuation allowance?

Answer options:

Debit Valuation Allowance $10,000; Credit Income Tax Expense $10,000

Debit Income Tax Expense $30,000; Credit Valuation Allowance $30,000

Debit Income Tax Expense $10,000; Credit Valuation Allowance $10,000

Debit Deferred Tax Asset $10,000; Credit Valuation Allowance $10,000

How to approach this question

Valuation Allowance is a contra-asset (Credit balance). It reduces the DTA to the realizable amount. The offset is Income Tax Expense.

C.Debit Income Tax Expense $10,000; Credit Valuation Allowance $10,000✓ Correct

Unrealizable portion = $40,000 - $30,000 = $10,000. <br/>Entry: Dr Income Tax Expense $10,000; Cr Valuation Allowance for DTA $10,000.

Recording allowance for the realizable amount instead of the unrealizable amount.

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