[Jasminekoko]

Hi,

I thought I send you a post through here instead of posting it under the “Ninja MCQ accounting income tax help ” topic. I did not get answer from you regarding your response to my question on the Ninja MCQ, so I asked a Becker professor. This is the response: “

This question is asking about 2002. Think of it this way, if the DTA is written down to 0 in 2001, then there is nothing left to carry forward to 2002. In that case the JE for 2002 is:

debit income tax expense 360,000

Credit income tax payable 360,000.

Total income tax expense is the same. Yes, if we reverse the valuation account in year 3 then we would add the following:

debit valuation account 120,000

Credit income tax benefit 120,000

This would result in total income tax expense of 240,000. However the question does not say we reversed the valuation account and you should not assume that. So 360,000 is the answer that was desired by the AICPA on the exam. There was some dispute about this question, which is why you will notice in the Becker material we do not talk about them not being sure about earning income in the future to take this issue away from the calculation of the 3rd year tax expense. The rules have evolved on this – while it is clear when you create a valuation allowance it is not as clear when you reverse it. And you don’t assume that you will reverse it here. “

So now, I am confused.

[excel monkey]

What's so confusing? The answer to the Becker question is 360,000 because it doesn't mention anything about a valuation allowance. The answer to the Ninja question is 240,000 because of the valuation allowance mentioned. Two different questions, two different answers. The Becker guy even told you they changed the question to avoid the disputes around it.

As far as his explanation that we shouldn't assume the allowance would be reversed in the question, I have to respectfully disagree. He's effectively saying the company would forgo the NOL carryforward for the year and pay taxes on the entire 1.2 million of taxable income. That's not going to happen in real life*, especially with a company that has uncertainty around its future earnings. I'd hate to be the one who had to try to sell that to the CFO/CEO – “Hey, I know we lost a bunch of money last year, and everyone is surprised by our earnings this year, but I think we should hold onto our NOL carryforward. I mean, we have nothing better to do with that $120,000 we would save in taxes, so why don't we give it to Uncle Sam. Maybe we'll surprise everyone again next year with some taxable earnings, but I don't know if we should use our NOL. Maybe we should just hold onto it till it expires, you know, cause its not clear if we should use it or not.” You would be lucky to keep your job after that.

*There is only one time I can think of that a company would hold onto an NOL for a year, and that's if the tax rate increased. The top US corporate tax rate hasn't increased (or decreased) in the last 20+ years, the last time was a 1% increase around '92 if I remember correctly.

FAR - 91
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BEC - 86
REG - 79

[Author]

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