VA1. Using the following information from the prior assignment relating to Exhibit 5-7 (PCC Company), determine whether a valuation allowance should be established against the deferred tax assets?

• Pre-tax book income of $6,017,000 in 2018 (first year of operation)
• Pre-tax book loss of $6,000,000 in 2019
• Assume same book/tax differences in each year. Calculate the ending DTA and DTL's.

Discuss "cumulative losses in recent years" (from PwC's ASC 740 guide) and the four sources of taxable income described under ASC 740-10-30-18 to conclude whether or not a valuation allowance needs to be established.

VA2.  ABC Corp generated a net capital loss of $100,000 during the current year. For financial accounting purposes, the capital loss is recognized in full in the current year, while for tax return purposes, net capital losses can be carried back three years and forward five years to offset capital gains.

·         Scenario 1: ABC Corp has net capital gains in excess of $100,000 in the prior three years and capital gains are expected in the future.

·         Scenario 2: ABC Corp has net capital gains of $60,000 in the prior three years, no capital gains are expected in the future and ABC Corp does not have any tax planning strategies.

·         Scenario 3: ABC Corp has no net capital gains in the prior three years, no capital gains are expected in the future and ABC Corp does not have any tax planning strategies.

·         Scenario 4: ABC Corp has no net capital gains in the prior three years, no capital gains are expected in the future, and ABC Corp could sell certain assets that would generate capital gains in the future.

In each of the above four scenarios, discuss the four sources of taxable income described under ASC 740-10-30-18 that ABC Corp should consider to determine whether a valuation allowance must be established against the capital loss carryover. Please document your reasons (four sources of taxable income) for why or why not a valuation allowance is needed.

UTP1.       Briefly describe the two-step process a company must undertake when it evaluates whether it can record the tax benefit from an uncertain tax position under ASC 740.

UTP2.       Where on the balance sheet does a company report its unrecognized tax benefits?

UTP3.       ABC Corporation determined that $1,000,000 of its research tax on its current year tax return was uncertain, but that it was more likely than not to be sustained on audit. Management made the following assessment of the company’s potential tax benefit from the deduction and its probability of occurring.

Potential Estimated               Individual Probability              Cumulative Probability

    Benefit                                   of Occurring (%)                           of Occurring (%)     

$1,000,000 40                                                         40

700,000                                       25                                                         65

500,000                                     20                                                         85

    0                                              15                                                       100

What amount of the tax benefit related to the uncertain tax position from the research tax credit can ABC Corporation recognize in calculating its income tax provision in the current year?

What is the tax entry to record the uncertain tax benefit?

UTP4.       How would your answer to problem UTP3 change if management determined that there was only a 50/50 chance any portion of the $1,000,000 research tax credit would be sustained on audit? Prepare the tax entry.