Question

In year 1, kelley estimates bad debt expense of $10,000 for financial reporting purposes. the amount of bad debts deductible on the tax return was $2,000. the difference will be deducted on the tax return in the following year. the income tax rate is 40%. what is the balance in the deferred tax asset account at the end of year 1?

a. $800
b. $4,000
c. $3,200
d. $8,000

Answer 1

The balance in the deferred tax asset account at the end of year 1 is $3,200.

Step-by-step explanation:

The balance in the deferred tax asset account at the end of year 1 can be calculated by finding the difference between the bad debt expense for financial reporting purposes and the amount of bad debts deductible on the tax return. In this case, the bad debt expense for financial reporting purposes is $10,000 and the amount deductible on the tax return is $2,000. Therefore, the difference is $10,000 - $2,000 = $8,000.

Since the bad debts deductible on the tax return is lower than the bad debt expense for financial reporting purposes, it creates a deferred tax asset. This deferred tax asset represents the future tax benefit that the company will receive when it deducts the remaining $8,000 in the following year.

The income tax rate is given as 40%. Therefore, the deferred tax asset at the end of year 1 would be $8,000 * 40% = $3,200.