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P18 - 75 NOL carryforward and valuation allowance DNSE Inc. began operations in Year 1. In its first year the company had a net operating loss of $(10,000), which was carried forward and used to reduce income tax payable in Year 2. In Year 2, DNSE had taxable income of $40,000 before the use of the NOL carryforward. At December 31 of Year 2, DNSE Inc. determines that it should have a deferred tax asset ending balance of $25,000 related to Year 2 deferred revenue. The income tax rate is 25%. No valuation allowance has been established. Required a. Provide the journal entry to record income taxes in Year 2, assuming that no valuation allowance is required. b. Now assume DNSE has encountered stiff competition and is uncertain whether it will have any taxable income in the foreseeable future. DNSE determined that it was more likely than not that none of the deferred tax asset would be realized. Assume also that the temporary differences that give rise to the deferred tax asset are expected to reverse in Year 3 and Year 4. (1) Determine what amount, if any, should be recorded as a deferred tax asset valuation allowance at December 31 of Year 2, and (2) make the appropriate entry. Assume DNSE has already recorded the entry in part a. c. Show how the December 31 of Year 2 balance sheet and income statement would present the information provided, assuming that a deferred tax asset valuation allowance is recorded

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