Question

When making an entry to increase the valuation allowance, which entries affect the valuation allowance and income tax expense respectively?

a) Debit; credit
b) Credit; debit
c) Debit; debit
d) Credit; credit

Answer 1

When making an entry to increase the valuation allowance, a debit entry affects the valuation allowance, and a credit entry affects income tax expense.

Step-by-step explanation:

When making an entry to increase the valuation allowance, the entry that affects the valuation allowance is a debit entry, and the entry that affects income tax expense is a credit entry.

Here's an explanation of why this is the case:

1. Valuation allowance: The valuation allowance is a contra-account to deferred tax assets, representing the amount of an asset that may not be realized. If there is an increase in the valuation allowance, it means that the company believes it is more likely than not that the deferred tax asset will not be realized. This decrease in the value of the asset is recorded as a debit entry to the valuation allowance.
2. Income tax expense: When the valuation allowance is increased, it indicates that the company expects to pay less in taxes in the future. As a result, the income tax expense is reduced, which is recorded as a credit entry.