After many years of success, Kaputnik Co. recorded net operating losses for the

Question

After many years of success, Kaputnik Co. recorded net operating losses for the years 2014 through 2017, totaling $250 million, and resulting in the recording of large deferred tax assets based on the assumption of a rapid return to profitability. However, attempts by management to revamp its outmoded business model have so far failed. A radical final attempt to save the company will be implemented in 2018. It will entail selling off the vast majority of Kaputnik’s asset groups while maintaining a small but promising segment. The projected outlook for the near term is a modest net profit of $5 million over the next three years, beyond which it is impossible to determine if Kaputnik Co. will even still be in existence. The enacted tax rate has been 35% for the last several years and is expected to remain the same in the future. Kaputnik has never recorded a deferred tax asset valuation allowance. Given these facts, what amount should Kaputnik record as Valuation allowance – deferred tax asset as part of its 2017 year-end adjusting entries?

Multiple Choice

$85,750,000

$87,500,000

$110,250,000

$112,000,000

Explanation / Answer

Valuation ALlowance reduces the DTA(Deferred Tax Asset). Since Kaputnik has incurred net loss totalling $250 million over the period of 2014 to 2017, the company should reverse its DTA by the amount of $250 Million X 35%( Tax Rate)= 87.5 Million.

The estimated future profits of $5Millions over next 3 years are irrelevant for the question.

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