Inferno Inc. is embroiled in a lawsuit. In 2018, they recognize that a loss of $65,000 is probable. Given a tax rate of 40%, how will this be treated in the accounting records?

Question

Quizplus · Accepted Answer

A probable loss of $65,000 would result in a deferred tax asset of $26,000, calculated as $65,000 multiplied by the tax rate of 40%. This is because the loss will reduce taxable income in the future, creating a future tax benefit.