D is corrent. Per ASC Topic 740, a deferred tax liability or asset is recognized for all temporary differences and operating loss and tax credit carryforwards. When a deferred tax asset is recorded, the entity must consider the need for a valuation allowance. In assessing the need for a valuation allowance, provisions in the tax law that may limit utilization of an operating loss or tax credit carryforward are applied in determining whether it is more likely than not that some portion of the deferred tax asset will not be realized by reduction of taxable income or taxes payable during the carryforward period. For Colt Corp., it is not more likely than not that a part or all of the benefit will not be realized in future years. Therefore, the tax benefit of the loss carryforward to be recorded in Colt’s income statement is $54,000 ($180,000 x 30%).
A is incorrect. Per ASC Topic 740, a deferred tax liability or asset is recognized for all temporary differences and operating loss and tax credit carryforwards. When a deferred tax asset is recorded, the entity must consider the need for a valuation allowance. In assessing the need for a valuation allowance, provisions in the tax law that may limit utilization of an operating loss or tax credit carryforward are applied in determining whether it is more likely than not that some portion of the deferred tax asset will not be realized by reduction of taxable income or taxes payable during the carryforward period. For Colt Corp., it is not more likely than not that a part or all of the benefit will not be realized in future years. Therefore, the tax benefit of the loss carryforward to be recorded in Colt’s income statement is $54,000 ($180,000 x 30%).
B is incorrect because this amount represents the amount of loss, net of tax.
C is incorrect because $180,000 represents the total pretax loss incurred.
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