Question

Dix Company reported operating income (loss) before income tax in its first three years of operations as follows:

20x1 $ 100,000
20x2 (200,000)
20x3 240,000
Dix had no permanent or temporary differences between book income and taxable income in these years. Assume a 21% tax rate for all years, and assume there is no valuation allowance.
What amount of deferred tax asset should Dix report on its December 31, 20X2, balance sheet?

Answer 1

The deferred tax asset for Dix Company on December 31, 20X2, is $(42,000), resulting from their 20x2 operating loss and a 21% tax rate, with no differences between book and taxable income.

Step-by-step explanation:

The Dix Company has experienced an operating loss before income tax in the year 20x2, amounting to $(200,000). Given there are no permanent or temporary differences between book income and taxable income, we can directly calculate the deferred tax asset for the year 20x2.

To calculate the deferred tax asset, we multiply the loss by the tax rate. Therefore, the calculation is $(200,000) × 21% = $(42,000). Since the company can carry forward this loss to offset against future taxable income, it will create a deferred tax asset of $(42,000) to be reported on the December 31, 20X2, balance sheet.

The deferred tax asset that Dix Company should report on its December 31, 20X2, balance sheet is $(42,000). This is due to the operating loss before income tax, with no differences between book and taxable income at a 21% tax rate.