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

Answer 1

Answer: $3,200

Step-by-step explanation:

The following information can be deduced from the question:

Bad debt expense = $10,000

Bad debts deductible on tax return = $2000

Income tax rate = 40%

Therefore, the balance in the deferred tax asset account at the end of year 1 will be calculated thus:

= 40% x ($10,000 - $2,000)

= 0.4 × $8000

= $3,200