Farmer Co. purchased a sowing machine on January 1, 2013. For its sowing machines, Farmer Co. uses straight-line depreciation for financial reporting purposes (US GAAP) and accelerated depreciation for tax purposes. The book value of the newly purchased sowing machine is $1,500. Its useful life is 3 years. Assume income before depreciation is $1,000 in 2013, $900 in 2014, and $1100 in 2015, respectively. Farmer Co. has a 30% income tax rate for all years. The depreciation table is as follows:

	2013	2014	2015
Straight-Line Depreciation	$500	$500	$500
Accelerated Depreciation	$850	$450	$200

a. Fill out the excerpted income statements under US GAAP rules and tax rules for the years 2013 and 2014. The income statement format to complete is:

Income before depreciation

Depreciation

Income before tax

Income tax

b. Use the financial statement template to indicate the effects of income taxes on the companys financial statements. Assume the company pays cash for its taxes as they are due. (There will be two transactions listed in the financial statement effects template: "Record tax expense for 2013" and "Record tax expense for 2014.")

c. The footnote of the 2013 annual report of Farmer Co. disclosed a valuation allowance of $487 related to various deferred tax assets. The 2012 valuation allowance had a balance of $323.

Why did Farmer Co. report the valuation allowance?

Can the valuation allowance be manipulated by managers? Why?