A company had total Deferred Tax Assets related to NOLs of $35,000. It also had a Valuation Allowance of $10,000 due to the NOLs in the Faroe Islands. Now, the company thinks that it is more likely than not that it will be able to use the NOLs in the Faroe Islands. The statutory tax rate is 42.0% in the Faroe Islands.
Increase Net Income by $4,200
The journal entry to eliminate the Valuation Allowance is Dr. Valuation Allowance 10,000; Cr. Income Tax Expense 10,000. This will reduce Income Tax Expense by 10,000 and increase Net Income by 10,000.