At the end of the current year (year 4), DIG company’s only temporary differences are deductible temporary differences in the amount of $4,000.

At the end of the current year (year 4), DIG company’s only temporary differences are deductible temporary differences in the amount of $4,000. The company determines that it is more likely than not that future taxable income will not be sufficient to realize a tax benefit of $1,000 of the $4,000. Pre-tax financial income, taxable income, and taxes paid for each of the years 1-4 are all positive, but relatively negligible, amounts. The statutory tax rate is 30% for all years. What is the amount of valuation allowance, if any, to be recorded by the company at the end of year 4?

A. $300

B. $1,000

C. $1,200

D. $0

Expert Solution

Valuation allowance is reserve created to offset the amount of deferred tax asset. It is based on that portion of the tax asset for which it is more likely than not that a tax benefit will not be realized by the reporting entity.

In the given case, valuation allowance shall be created on the amount of $ 1000.

Valuation allowance = 1000 * 30% =$ 300

Hence, correct option is $ 300

ekkarill92 answered 2 years ago

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