Zeta Corporation reported taxable income for 2013 of $200,000. The enacted tax rate for 2013 is 40%. During 2013, Zeta became the defendant in a lawsuit. The lawsuit has not been resolved at the end of the period, but Zeta's lawyers believe that it is probable that the company will be held liable. The legal office estimated that the amount of loss will be $80,000. As a result, the lawsuit has been recognized as a contingent liability. However, the legal obligation is not deductible for tax purposes during 2013. The lawsuit represents the only difference between financial income and taxable income for the year.

Required:

1. Assume that Zeta Company has been quite profitable in past periods and expects to continue that pattern in the future. Record an entry to recognize tax expense, tax payable, and deferred tax for 2013.

2. Assume that there is substantial doubt about whether Zeta Company will be profitable in future periods. As a result, the company believes that one-half of the future deduction for legal costs will not be realized. Record an entry to recognize tax expense, tax payable, and deferred tax for the year.

3. Explain what circumstances require that a valuation allowance account should be utilized when deferred tax is recognized. How should that account be presented on the financial statements?

4. Prepare your answer to Requirement 2 assuming that Zeta prepares financial statements according to IFRS.