After many years of success Kaputnik Co recorded net operati

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

Solution

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.