JR Company incurred a loss in 2011,due in part to a fire at one of its plants.The deferred benefit of a loss carry forward was not recognized in the year as the probability of realization was less than 50%.In 2012,JR Company incurred a small loss,but due to large contracts upcoming,it was determined that the probability of realization was greater than 50%.The tax rate for 2011 was 40% and 2012 45%.JR Company should:
A) Record the deferred income tax benefit for 2012 only.
B) Record the deferred income tax benefit for both years using the 40% rate.
C) Record the deferred income tax benefit for both years using the 45% rate.
D) Record the deferred income tax benefit for 2011 only.

Question

Quizplus · Accepted Answer

According to ASC 740, a deferred tax asset can only be recognized if it is more likely than not (probability greater than 50%) that the benefit will be realized. In 2011, the company did not recognize the deferred tax asset because the probability of realization was less than 50%. However, in 2012, due to the upcoming large contracts, the probability of realization increased to more than 50%.

Therefore, the deferred tax benefit should be recognized for both years, using the 45% tax rate for 2012 since it was the current tax rate at that time. This option is more appropriate than using the 40% tax rate, which was the tax rate for 2011 and not relevant to 2012. The answer choices A and D are incorrect because the deferred tax benefit should be recognized for both years, not just in one year.

JR Company Incurred a Loss in 2011,due in Part to a Fire