Chapter 16, Problem 16.6BE

Valuation allowance

• LO16–2, LO16–3

At the end of the year, the deferred tax asset account had a balance of $12 million attributable to a cumulative temporary difference of $30 million in a liability for estimated expenses. Taxable income is $35 million. No temporary differences existed at the beginning of the year, and the tax rate is 40%. Prepare the journal entry(s) to record income taxes, assuming it is more likely than not that one-fourth of the deferred tax asset will not ultimately be realized.