Question

Carson has a deferred tax asset of $10,000. at the end of the year, carson's accountant determines that it is more likely than not that $3,000 of the deferred tax asset will not be realized. which of the following is included in the journal entry at year-end? (select all that apply.

a. Decrease Deferred Tax Asset by $3,000
b. Record a Loss of $3,000
c. Decrease Income Tax Expense by $3,000
d. Record a Valuation Allowance of $3,000

Answer 1

The correct journal entries for adjusting a deferred tax asset that is unlikely to be realized are decreasing the Deferred Tax Asset and recording a Valuation Allowance, both by the amount not expected to be realized.

Step-by-step explanation:

The journal entry for Carson's deferred tax asset adjustment involves a decrease in the Deferred Tax Asset by $3,000 and the establishment of a valuation allowance of $3,000. This adjustment acknowledges that $3,000 of the deferred tax asset is unlikely to be realized. The entry does not directly record a loss on the income statement; instead, it addresses the valuation of the deferred tax asset on the balance sheet.

The creation of the valuation allowance is a precautionary measure to adjust the carrying value of the deferred tax asset, reflecting the portion deemed unlikely to be realized. This adjustment does not have a direct impact on the income statement or Income Tax Expense. Hence, the correct options are to decrease the Deferred Tax Asset by $3,000 and record a Valuation Allowance of $3,000, reflecting the conservative assessment of the asset's realizability.