DREAMWORKSANIMATIONSKG,INC. NOTESTOCONSOLIDATEDFINANCIALSTATEMENTS—(Continued) 11. Valuation and Qualifying Accounts and Reserves The following is a summary of the valuation and qualifying accounts included in the consolidated balance sheets for the years ended December 31, 2002, 2003, and 2004 (in thousands): Deductions Balance at Chargedto and Beginning (Credited) BadDebt Balance at of Period Operations Write-offs EndofPeriod Trade accounts receivable Allowance for doubtful accounts 2002 ...................................... $ 624 $2,300 $(1,077) $1,847 2003 ...................................... 1,847 824 (325) 2,346 2004 ...................................... 2,346 752 (1,971) 1,127 Balance at Beginning Chargedto Chargedto Balance at (1) of Period Expenses other Accounts EndofPeriod Deferred tax assets Valuation allowance 2002 ................................... — — — — 2003 ................................... — — — — 2004 ................................... — $33,569 $544,031 $577,600 (1) Amountsnotcharged to expenses were charged to equity. 12. Accrued Liabilities Accrued liabilities consists of the following: December31, December31, 2003 2004 Fair value of derivative instruments ....................................... $31,828 $ 110 Accrued distribution costs ............................................... 31,654 1,513 Participations and residuals .............................................. 13,254 32,692 Production costs ....................................................... 3,331 6,443 Occupancy ........................................................... 8,744 9,844 Other accrued liabilities ................................................. 13,182 8,366 $101,993 $58,968 13. Income Taxes Effective as of the Separation, the Company is taxed at regular corporate rates. Deferred tax assets and liabilities are recognized for the tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. A deferred tax asset valuation allowance will be recorded if it is more likely than not that all or a portion of the recorded deferred tax assets will not be realized. Actual income tax expense on the consolidated statement of operations represents U.S. Federal and State income 92