Problem:

Saginaw Inc. completed its first year of operations with a pretax loss of $500,000. The tax return showed a net operating loss of $600,000, which the company will carry forward. The $100,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming the current tax expense is zero and tax rate is 34 percent.

Required:

Question 1: Prepare the journal entry to record the deferred tax consequences of the depreciation book-tax difference

Question 2: Prepare the journal entry to record the deferred tax consequences of the valuation allowance.

Note: Provide support for your rationale.