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Valuation Allowance of Deferred Tax Asset

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50. 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:

1. Why would Emmett not want to report a valuation allowance?

2. What evidence might the company offer to argue against recording a valuation allowance?

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?

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Solution Summary

The solution determines the valuation allowance of deferred tax asset for postretirement benefits.

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Emmet might not want to report a valuation allowance is this requires a corresponding debit to an expense account which can decrease ...

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