Question

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.

Required:
1. What amount of deferred tax asset should Dix report on its December 31, 20X2, balance sheet?

Answer 1

Dix should report a deferred tax asset of $(42,000) on its December 31, 20X2, balance sheet, calculated as the $200,000 operating loss multiplied by the 21% tax rate.

Step-by-step explanation:

The question involves calculating the deferred tax asset for a company named Dix, which reported an operating loss before income tax in the year 20X2. To compute the deferred tax asset, we first determine the tax benefit the company would receive from its loss. Since Dix has an operating loss of $200,000 in 20X2 and assuming there are no permanent or temporary differences between book income and taxable income, the tax benefit is calculated as the loss multiplied by the tax rate.

Deferred tax asset calculation:

• Operating loss in 20X2: $(200,000)
• Tax rate: 21%
• Deferred tax asset: $(200,000) * 21% = $(42,000)

Since the deferred tax asset is a positive number, we record it as an asset. Therefore, on December 31, 20X2, Dix would report a deferred tax asset of $(42,000) on its balance sheet.