DNSE Inc. began operations in 2019. In its first year the company had a net operating loss of \(\$ 10,000\), which was carried forward and used to reduce income tax payable in 2020. In 2020, DNSE had taxable income of \(\$ 40,000\) before the use of the NOL carryforward. At December 31, 2020, DNSE Inc. determines that it should have a deferred tax asset ending balance of 25,000 related to 2020 deferred revenue. The income tax rate is \(25 \%\). No valuation allowance has been established.

Required

a. Provide the journal entry to record income taxes in 2020 , assuming that no valuation allowance is required,

b. Now assume DNSE has encountered stiff competition and is uncertain whether it will have any taxable income in the foreseeable future. DNSE determined that it was more likely than not that none of the deferred tax asset would be realized. Assume that the temporary differences that give rise to the deferred tax asset are expected to reverse in 2021 and 2022. Determine what amount, if any, should be recorded as a valuation allowance at December 31, 2020, and make the appropriate entry. Assume DNSE has already recorded the entry in part \(a\).

c. Show how the December 31, 2020, balance sheet and income statement would present the information above, assuming that a valuation allowance is recorded.