At December 31, 2020, Coronado Corporation has a deferred tax asset of $220,000. After a careful review of all available evidence, it is determined that it is more likely than not that $66,000 of this deferred tax asset will not be realized. Prepare the necessary journal entry.

The necessary journals to be recorded would be:

Debit Income tax expense                    $66,000

Credit Deferred tax asset                      $66,000

(To reduce deferred tax to realizable value)

With this adjustment, the balance in deferred tax assets would be $154,000 ($220,000 - $66,000).

Explanation:

Deferred tax assets are used to reduce future taxable income. There is usually an assessment of deferred tax recoverability, which is carried out on an annual basis. Based on IAS 12.37, "The carrying amount of deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized. Any such reduction is subsequently reversed to the extent that it becomes probable that sufficient taxable profit will be available".

Based on the above, $66,000 was deemed as not realizable; therefore, the deferred tax asset would be reduced by this extent.

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