Valuation Allowance HW

Using the following information from the prior assignment relating to Exhibit 5-8 (PCC Company), determine whether a valuation allowance should be established against the deferred tax assets?
Pre-tax book income of $5,131,000 in Year 1  (first year of operation)
Pre-tax book loss of $5,000,000 in Year 2
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.