Final answer:
A valuation allowance account for deferred taxes reduces the deferred tax asset account and increases tax expense. It does not increase the deferred tax liability nor reduce tax expense. The correct answers are options: b) it reduces the deferred tax asset account and c) it increases tax expense.
Step-by-step explanation:
A valuation allowance account for deferred taxes is an accounting concept that affects the presentation of deferred tax assets and liabilities on the balance sheet. When a valuation allowance is set up, it indicates that it's more likely than not that some portion or all of the deferred tax asset will not be realized. The effects of creating a valuation allowance account for deferred taxes include:
- It reduces the deferred tax asset account, as the allowance is a contra-account to the deferred tax assets, indicating that the company does not expect to fully utilize the asset.
- It increases tax expense in the profit and loss statement. This is because the valuation allowance effectively reduces the deferred tax asset, which is an anticipated future tax benefit, thereby increasing the current period's tax expense.
The valuation allowance does not increase the deferred tax liability account nor does it reduce tax expense.