Reference no: EM132962491

Problem 1: Klapper Company claimed a tax deduction which was uncertain when it was deducted in 20X1 but is relatively certain of receiving the deduction over a five-year period. Which of the following is not correct in accounting for the uncertain tax item?

Multiple Choice

Option 1: Income tax expense in the first year is the current portion of income tax expense minus the increase in the deferred tax asset.
Option 2: The contingency reserve is reduced each year with the offset to the deferred tax account.
Option 3: As the company will ultimately get 100% of the deduction, no contingency reserve is required.
Option 4: A contingency reserve will be set up at the same amount as the deferred tax asset if the firm is certain it may claim 100% of the deduction over time.