| Course | ACC-6010 Intermediate Accounting III |
|---|---|
| Module | Module 3 |
| Paper type | Written Assignment 3: accounting for income taxes |
| Length | About 734 words, 5 pages |
| Format | APA 7 student paper |
| School | Thomas Edison State University |
| Program | M.S. in Management in Accounting |
| Updated | October 2026 |
Free sample paper for ACC 6010 Module 3
Palisades Optical Corp.: Using a Loss Carryforward Under the 80% Limit and Testing the Deferred Tax Asset
Student Name
M.S. in Management in Accounting, Thomas Edison State University
ACC-6010: Intermediate Accounting III
Mentor Name
Month Day, Year
Palisades Optical Corp.: Using a Loss Carryforward Under the 80% Limit and Testing the Deferred Tax Asset
Introduction
A company's tax return and its financial statements measure income under different rules, and deferred taxes reconcile them. Kieso et al. (2012) describe the asset-liability approach, in which deferred tax assets and liabilities represent the future tax effects of differences that exist today. Since 2018, federal net operating losses arising in later years can be carried forward indefinitely but can offset only 80% of taxable income in any year, which changes how quickly a loss turns into cash savings.
The Facts
Palisades lost $900,000 for tax purposes in 2025, creating a deferred tax asset of $189,000 at 21%. In 2026 it earned pretax book income of $1,150,000. Tax depreciation exceeded book depreciation by $120,000, and warranty expense accrued for books exceeded warranty costs paid, which are deductible when paid, by $70,000.
Problem 1: Taxable Income and Taxes Payable
Only $880,000 of the $900,000 loss can be used, leaving $20,000 to carry forward. Under the pre-2018 rules, the entire loss could have offset income; the 80% limit means Palisades pays some tax even though it has unused losses.
| Computation | Amount |
|---|---|
| Pretax book income | $1,150,000 |
| Excess tax depreciation | (120,000) |
| Warranty expense not yet deductible | 70,000 |
| Taxable income before the loss carryforward | 1,100,000 |
| Loss carryforward, limited to 80% of $1,100,000 | (880,000) |
| Taxable income | 220,000 |
| Income taxes payable at 21% | $46,200 |
Problem 2: Deferred Taxes and Total Expense
Adding the $46,200 owed now to the $195,300 deferred charge gives $241,500 of tax expense, exactly 21% of the $1,150,000 book profit before tax. The match confirms there are no permanent differences.
| Deferred item | Beginning | Ending | Change in expense |
|---|---|---|---|
| Liability for depreciation difference | None | $25,200 | +25,200 |
| Asset for warranty accrual | None | 14,700 | (14,700) |
| Asset for loss carryforward | $189,000 | 4,200 | +184,800 |
| Deferred tax expense | | | $195,300 | |
| Journal entry | Debit | Credit | |
| Income Tax Expense | 241,500 | None | |
| Deferred Tax Asset, warranty | 14,700 | None | |
| Income Taxes Payable | None | 46,200 | |
| Deferred Tax Liability, depreciation | None | 25,200 | |
| Deferred Tax Asset, loss carryforward | None | 184,800 |
Problem 3: Is a Valuation Allowance Needed?
When the odds favor some of a deferred tax asset never being used, an allowance trims it to the part expected to be used. Palisades' 2025 loss is negative evidence, and a recent loss can be hard to overcome. But the 2025 loss came from a single event, a product recall, Palisades has been profitable in seven of the last eight years, it returned to substantial profit in 2026 and the depreciation liability will reverse and create taxable income. The remaining assets, $14,700 for warranties and $4,200 for the loss, are small relative to expected income. No allowance is required. Had Palisades lost money in 2026 as well, the cumulative losses would have shifted the weight of evidence and an allowance would likely be needed. Phillips et al. (2003) showed that movements in deferred tax expense flagged companies nudging results to dodge a reported loss, one reason auditors press hard on allowance calls.
Two other issues could affect the deferred tax balances. If Congress changed the corporate rate, Palisades would remeasure every deferred tax asset and liability at the new enacted rate and record the effect in income from continuing operations in the period of enactment, as companies did when the 2017 law cut the rate from 35 to 21 percent. An aggressive filing position works differently: Palisades could book its benefit only if the position would probably survive an audit, and then only at the largest amount with better than even odds of holding. Graham et al. (2012) review studies showing that allowance changes can be timed to steer earnings toward targets, so the evidence behind any release should be written down.
IFRS Application
For Palisades, both frameworks would recognize the same net asset, since realization is likely either way. The presentation differs: U.S. GAAP shows the gross asset and any allowance in the notes, while IAS 12 shows only the amount recognized.
| Feature | U.S. GAAP | IAS 12 |
|---|---|---|
| Recognizing deferred tax assets | Recognize in full, then reduce with a valuation allowance if realization is not more likely than not | Recognize only to the extent realization is probable, with no separate allowance |
| Tax rates used | Enacted rates | Enacted or substantively enacted rates |
| Balance sheet classification | All noncurrent | All noncurrent |
| Uncertain tax positions | Two-step recognition and measurement | Probable acceptance test, measured at most likely amount or expected value |
References
Graham, J. R., Raedy, J. S., & Shackelford, D. A. (2012). Research in accounting for income taxes. Journal of Accounting and Economics, 53(1-2), 412-434. https://doi.org/10.1016/j.jacceco.2011.11.006
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2012). Intermediate accounting (14th ed.). John Wiley & Sons.
Phillips, J., Pincus, M., & Rego, S. O. (2003). Earnings management: New evidence based on deferred tax expense. The Accounting Review, 78(2), 491-521. https://doi.org/10.2308/accr.2003.78.2.491
Reading the ACC 6010 Module 3 assignment instructions
Module 3 covers accounting for income taxes, and its written assignment combines exercises, problems and an IFRS application, as most of ACC-6010's nine written assignments do; together they carry 60 percent of the grade. Expect to compute taxable income from book income, schedule temporary differences, record deferred tax assets and liabilities, apply loss carryforwards and the valuation allowance, handle tax rate changes and compare U.S. GAAP with IAS 12. Kieso's 14th edition was written before the 2017 tax law, so check the current loss carryforward rules and the 21% rate when your problem uses recent years. The numbers on this page are made up for teaching; they continue the invented company from the earlier assignments.
Inside the ACC 6010 Module 3 example
The introduction explains the asset-liability approach and the post-2017 loss rules that make this problem interesting. The facts are stated in one paragraph. Problem 1 computes taxable income in a table and shows the 80% limit at work, leaving a small carryforward. Problem 2 tabulates the beginning and ending deferred items, computes deferred tax expense, proves that total expense equals the statutory rate on book income and records the entry. Problem 3 weighs positive and negative evidence on the valuation allowance, with research on why the judgment draws scrutiny. The IFRS application compares four features and explains the presentation difference.
Where the marks sit in the ACC 6010 Module 3 rubric
The tax allocation set is scored like the other eight written assignments, all of which share 60 percent of the grade. For income taxes, mentors check taxable income computed with the right signs, the loss carryforward limited correctly, deferred items measured at the enacted rate, an entry that balances and a valuation allowance conclusion that weighs evidence rather than asserting a result. IFRS answers should identify the recognition difference under IAS 12. A reconciliation showing that total expense equals the statutory rate on book income, adjusted for any permanent differences, is a strong sign of accuracy and earns credit. A rate reconciliation that starts at 21 percent of book income and ends at the effective rate, with each item explained, shows full command of the topic.
ACC 6010 Module 3 help: mistakes that cost marks
Tax problems go wrong when students apply old rules: since 2018, federal losses carry forward indefinitely but offset only 80% of taxable income, and carrybacks are generally gone. Check which year's rules your problem uses. Track each temporary difference separately so you know whether it creates an asset or a liability. Measure deferred items at the rate expected when they reverse. Weigh both kinds of evidence on the valuation allowance and say which outweighs the other. Schedule the reversal of each temporary difference by year before deciding on a valuation allowance, since timing drives the answer. The desk will draft a first worked sample from your own tax data at no charge.
Write yours, or have the desk draft it
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ACC 6010 Module 3 questions, answered
Where can I find a free ACC 6010 Module 3 sample paper?
The Palisades Optical income tax assignment is printed above: taxable income with an 80%-limited loss carryforward, deferred tax changes, the journal entry, a valuation allowance decision and an IAS 12 comparison.
How much taxable income can a net operating loss offset?
For federal losses arising after 2017, a carryforward can offset up to 80% of taxable income in a year, with no expiration.
When is a valuation allowance required?
Once the weight of the evidence, good and bad, makes it likelier than not that part of the asset will go unused.
How does IAS 12 differ on deferred tax assets?
IAS 12 recognizes deferred tax assets only to the extent realization is probable, without a separate valuation allowance account.
How do you check that deferred tax entries are correct?
Total tax expense should equal the statutory rate times pretax book income, adjusted for any permanent differences.