Saginaw Inc. completed its first year of operations with a pretax loss of $585,000. The tax return showed a net operating loss of $746,000, which the company will carry forward. The $161,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that it should record a valuation allowance equal to the net deferred tax asset. Assuming the current tax expense is zero, prepare the journal entries to record the deferred tax provision and the valuation allowance.

Solution :

It is given in the question that :

The pretax loss = $ 585,000

Net operating loss showed by the tax return = $ 746,000

Excess tax depreciation over the book depreciation = $161,000

Current tax expense = 0%

∴Tax rate = 34%

So the journal entry to record the deferred tax consequences of the evaluation allowances are provided below :

Particulars                                                                     Debit           Credit

Deferred tax benefit ((746,000 - 161,000) x 34%)       $198,900

Valuation allowance                                                                        $198,900

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