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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Refer to RE18-3. Prepare the additional journal entry necessary for Madison Corporation assuming that the corporation decides that it is “more likely than not” that $500 of the $5,000 future deductible amount will not be realized.

To determine

Prepare the additional journal entry that is necessary for Corporation M to record the future deductible amount that would not be realized.

Explanation

Valuation Allowance: Valuation allowance is that financial item that offsets the deferred tax assets either fully or partly as deferred tax assets are more likely not realizable.

Prepare the additional journal entry:

DateAccounts title and explanationPost Ref.DebitCredit
December 31, 2019Income Tax Expense (1) $125 
     Allowance to reduce deferred tax asset to realizable value  $125
 (To record the creation of valuation allowance)   

Table (1)

  • Income Tax Expense is the component of stockholders’ equity and decreases, so debit it for $125...

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