Question

Which of the following statements best describes a valuation allowance as it relates to accounting for income taxes? A. A valuation allowance is a contra account to deferred tax assets onlyB. A valuation allowance is a contra account to deferred tax liabilities onlyC. A valuation allowance is a contra account to deferred tax assets and liabilitiesD. A valuation allowance is a contra account to noncurrent deferred tax assets only

Answer 1

A valuation allowance is a contra account to deferred tax assets only-A.

Answer 2

A

Step-by-step explanation:

A valuation allowance is a reserve that is used to offset the amount of a deferred tax asset. The amount of the allowance is based on that portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the reporting entity.

It is a contra-account to a deferred tax asset account which shows the amount of deferred tax asset with a more than 50% probability of not being utilized in future due to non-availability of sufficient future taxable income. Valuation allowance is just like a provision for doubtful debts