Over the three years presented, changes in the valuation allowance for deferred tax assets were most likely indicative of:

A. decreased prospect for future profitability.

B. increased prospects for future profitability.

C. assets being carried at a higher value than their tax base.

A company’s provision for income taxes resulted in effective tax rates attributable to loss from continuing operations before cumulative effect of change in accounting principles that varied from the statutory federal income tax rate of 34 percent, as summarized in the table below.

Transcribed Image Text:

Year Ended 30 June Expected federal income tax expense (benefit) from continuing operations at 34 percent Expenses not deductible for income tax purposes State income taxes, net of federal benefit Change in valuation allowance for deferred tax assets Income tax expense 2007 2006 ($112,000) $768,000 357,000 32,000 132,000 22,000 (150,000) (766,000) $227,000 $56,000 2005 $685,000 51,000 100,000 (754,000) $82,000