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). Record the entry to adjust the allowance on December 31, 2020.

Answer 1

To adjust the valuation allowance against the deferred tax asset, Maui Resort Inc. must recognize a valuation allowance of $35,000 on its balance sheet. This is done by recording a journal entry that debits the Income Tax Benefit and credits the Valuation Allowance for Deferred Tax Assets by the difference between the total deferred tax assets and the amount estimated to be realizable ($31,000).

Step-by-step explanation:

The question pertains to accounting for the valuation allowance against deferred tax assets. If Maui Resort Inc. has a deferred tax asset of $50,000 and believes that only 30% is likely to be realized, then the company would be able to recognize only $15,000 (30% of $50,000) of the asset. The existing valuation allowance has a credit balance of $4,000, which needs to be adjusted to reflect that only $15,000 of the deferred tax asset is realizable. To adjust the valuation allowance to the appropriate level, an entry must be recorded to increase the allowance by $31,000 ($50,000 - $15,000 - $4,000).

The journal entry on December 31, 2020, would be as follows:

Debit: Income Tax Benefit $31,000

Credit: Valuation Allowance for Deferred Tax Assets $31,000

Answer 2

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 expected loss from unrealizable DTA and to increase the Allowance balance to $35,000.

Step-by-step 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) We can liken the Allowance for Doubtful Accounts to the DTA Valuation Allowance, which is a contra-account to the Deferred Tax asset Account. In it, the amount of the deferred tax asset that has a more than 50% probability of being lost or unutilized in the future arising from non-availability of sufficient future taxable income is accounted for.