Lafayette, Inc

question 14

Essay

Lafayette, Inc., completed its first year of operations with a pretax loss of $800,000. The tax return showed a net operating loss of $750,000. The $50,000 book-tax difference results from a disallowed deduction for business-related meals. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Prepare the journal entries to record the deferred tax provision and the valuation allowance.

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Definitions:

Stated Rate

The interest rate expressed in the terms of a loan or investment agreement, not including the effects of compounding.

Convertible Bonds

Bonds that can be converted into a predetermined number of the issuing company's shares at certain times during their life, usually at the discretion of the bondholder.

Common Stock

Represents ownership shares in a corporation, giving holders a claim on part of the company's profits in the form of dividends and voting rights at shareholders' meetings.

Bondholders

Individuals or entities that hold debt securities issued by corporations or governments, expecting to receive fixed interest payments and the principal back at maturity.