Valuation Allowance
Refer to Practice 16–8. The company had no taxable income in past years. Analysis of prospects for the future indicates that it is more likely than not that total taxable income in the foreseeable future will be no more than $400. Assume that the income tax expense journal entry required in Practice 16–8 has already been made. Make any necessary adjusting entry.
Practice 16–8
Deferred Tax Asset
On January 1, the company purchased investment securities for $1,000. The securities are classified as trading. By December 31, the securities had a fair value of $100 but had not yet been sold. Excluding the trading securities, income before taxes for the year was $5,000. Assume that there are no other book tax differences. The income tax rate is 45% for the current year and all future years. Assume that the company has been profitable in past years and is more likely than not to be profitable in future years. Prepare the journal entry or entries necessary to record income tax expense for the year.