All of the following statements are true with respect to a valuation allowance, with the exception of which item? O An increase in the valuation allowance is recorded with a credit to Valuation Allowance. An increase in the valuation allowance is warranted when a company believes that there is a 30% chance that it will not realize the tax benefits in full for a Deferred Tax Asset. O Valuation Allowance is a contra-account against a Deferred Tax Asset. An increase in the valuation allowance is warranted when a company believes that there is a greater than 50% likelihood that it will not realize the tax benefits in full for a Deferred Tax Asset.
All of the following statements are true with respect to a valuation allowance, with the exception of which item? O An increase in the valuation allowance is recorded with a credit to Valuation Allowance. An increase in the valuation allowance is warranted when a company believes that there is a 30% chance that it will not realize the tax benefits in full for a Deferred Tax Asset. O Valuation Allowance is a contra-account against a Deferred Tax Asset. An increase in the valuation allowance is warranted when a company believes that there is a greater than 50% likelihood that it will not realize the tax benefits in full for a Deferred Tax Asset.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Transcribed Image Text:### Understanding Valuation Allowances
The following statements are considered true with respect to valuation allowances, except for one. Review the statements below to test your understanding of when a valuation allowance is appropriate:
1. **Credit to Valuation Allowance**
- An increase in the valuation allowance is recorded with a credit to Valuation Allowance.
2. **Likelihood of Non-Realization (30% Chance)**
- An increase in the valuation allowance is warranted when a company believes that there is a 30% chance that it will not realize the tax benefits in full for a Deferred Tax Asset.
3. **Contra-Account Explanation**
- Valuation Allowance is a contra-account against a Deferred Tax Asset.
4. **Likelihood of Non-Realization (Greater than 50% Likelihood)**
- An increase in the valuation allowance is warranted when a company believes that there is a greater than 50% likelihood that it will not realize the tax benefits in full for a Deferred Tax Asset.
Determine which statement does not hold true in the context of valuation allowances.
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