Question

Horner Corporation has a deferred tax asset at December 31, 2015 of $160,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 2012–2014; 35% for 2015; and 30% for 2016 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of:$80,000

$60,000
$40,000

Answer 1

Valuation account = $80,000

Step-by-step explanation:

Given:

Valuation allowance is treated as a provision for doubtful debts.

Given:

Total Deferred tax asset = $160,000 × 50% = $80,000

Total benefited Deferred tax asset = $160,000 × 50% = $80,000

Computation of Valuation account:

Valuation account = Total Deferred tax asset - Total benefited Deferred tax asset

Valuation account = $160,000 - $80,000

Valuation account = $80,000