6) Assume Jackson Company determines that it is more likely than not that a port
ID: 2542818 • Letter: 6
Question
6) Assume Jackson Company determines that it is more likely than not that a portion of its deferred tax asset ultimately will not be realized and records an entry to increase its valuation allowance. Which of the following describes how the company’s financial statements will be impacted? (Select all that apply.)
Check All That Apply
a) The amount of income tax expense reported in the income statement will decrease.
b) The amount of income tax expense reported in the income statement will increase.
c) Total assets reported in the balance sheet will decrease.
d) Total assets reported in the balance sheet will increase.
7) Which of the following statements are correct regarding net operating losses? (Select all that apply.)
Check All That Apply
a) A NOL occurs when taxable revenues exceed tax-deductible expenses.
b) If a NOL carryback is used, any NOL that remains after the two-year carryback can then be carried forward.
c) Most companies elect to carry forward NOLs.
d) The tax benefit created by a net operating loss should be recognized in the income statement in the year the loss occurs.
Explanation / Answer
Part 6
Entry would be passed in which Debit to Income Tax Expenses and Credit to Valuation Allowance - Deferred Tax Assets would be there. This means that there is increase in income tax expenses. Hence Option B
Part 7
Option D
The tax benefit created by a net operating loss should be recognized in the income statement in the year the loss occurs Unless it's more likely than not that the future tax savings will not be realized.
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