Question

Maui Resort Inc. determined that the balance in its deferred tax asset account on December 31, 2020, was $50,000. Management reviewed all available positive and negative evidence to estimate that 30% of the deferred tax asset was more likely than not to be realized. The valuation allowance for deferred tax assets has a December 31, 2020, unadjusted balance of $4,000 (credit).
Required:
Record the entry to adjust the allowance on December 31, 2020.

Answer 1

Answer:

Maui Resort Inc.

Journal Entry:

December 31, 2020:

Debit Loss from Unrealizable DTA $31,000

Credit Allowance for Unrealizable DTA $31,000

To record the loss from unrealizable DTA and increase the balance to $35,000 (credit).

Explanation:

a) Data and Calculations:

December 31, 2020 Deferred Tax Asset (DTA) = $50,000

Estimate of realizable DTA = 30% of $50,000 = $15,000

Allowance for unrealizable DTA for 2020 = 70% of $50,000 = $35,000

Loss from unrealizable DTA = $31,000 ($35,000 - $5,000)

b) Like the Allowance for Doubtful Accounts, the DTA Valuation Allowance is a contra-account to the Deferred Tax asset Account.  It shows the amount of the deferred tax asset with a more than 50% probability of being lost or unutilized in the future as a result of the non-availability of sufficient future taxable income.