Chapter 18, Problem 7E

Deferred Tax Asset and Valuation Account Zeta Corporation reported taxable income for 2019 of $200,000. The enacted tax rate for 2019 is 40%. During 2019, Zeta became the defendant in a lawsuit. The lawsuit has not been resolved at the end of the period, but Zeta’s lawyers believe that it is probable that the company will be held liable. The legal office estimated that the amount of loss will IK $80,000. AS a result, the lawsuit has been recognized as a contingent liability. However, the legal obligation is not deductible for tax purposes during 2019. The lawsuit represents the only difference between financial income and taxable income for the year.

Required:

1. 1. Assume that Zeta Corporation has been quite profitable in past periods and expects to continue that pattern in the future. Record a journal entry to recognize tax expense, tax payable, and deferred tax for 2019.
2. 2. Assume that there is substantial doubt about whether Zeta Corporation will be profitable in future periods. As a result, the company believes that one-half of the future deduction for legal costs will not be realized. Record a journal entry to recognize tax expense, tax payable, and deferred tax for the year.
3. 3. Next Level Explain what circumstances require that a valuation allowance account should be utilized when deferred tax is recognized. How should that account be presented on the financial statements?
4. 4. Prepare your answer to Requirement 2 assuming that Zeta prepares financial statements according to IFRS.