Question
Pinecrest Studios made a tax loss of $200,000 in 2025. Because future taxable profits were probable, it recognised a deferred tax asset at the 30% rate then in force: $60,000 at December 31, 2025. Unused losses can be carried forward indefinitely.
In 2026 Pinecrest earned taxable profit of $120,000, equal to its accounting profit, and used $120,000 of the loss against it, so no tax is payable for 2026. During 2026 the government enacted a cut in the tax rate to 25%, effective for 2026 onward. Future profits are still expected to absorb the rest of the loss.
Required:
- Closing Deferred Tax Asset — the deferred tax asset at December 31, 2026.
- Journal Entry — the December 31, 2026 deferred tax entry. Use Income Tax Expense and Deferred Tax Asset.
- Statement Impact — the effect of that entry on the 2026 financial statements.
Statements in this challenge
- Closing Deferred Tax AssetNumeric Answer
- Journal EntryJournal Entry
- Statement ImpactStatement Impact
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 12 — Income Taxes
Current tax is the amount payable on the period's taxable profit; deferred tax arises from temporary differences between the carrying amount of an asset or liability and its tax base. Identify the temporary difference first, then apply the rate expected when it reverses.
Common mistakes
- Treating a permanent difference as though it created deferred tax — only temporary differences do.
- Using the current year's tax rate when an enacted future rate applies to the reversal.
- Presenting a deferred tax balance as current — under IAS 1 it is always non-current.
IFRS vs US GAAP: Deferred tax assets under US GAAP use a valuation allowance; IFRS instead recognises only to the extent recovery is probable.
Further readingIAS 12: deferred tax explained