Problem:
Emmett Company has a deferred tax asset of $1,000,000 at December 31, 2011. This amount arises from the recording of the company's liability for postretirement benefits other than pensions. The company's CPA has asked management whether a valuation allowance should be recorded to reduce the deferred tax asset to zero.
Required to do:
Question 1. Why would Emmett not want to report a valuation allowance?
Question 2. What evidence might the company offer to argue against recording a valuation allowance?
Question 3. Assume that the company determines that a valuation allowance of $400,000 is required. How would the company have arrived at this determination, and what effect will it have on net income for fiscal 2011?