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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.

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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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