Because Valuation Allowances are primarily a judgement call this assignment will focus simply on making that decision. We want you to practice flexing some professional judgement. There are a range of possible conclusions that would be considered "correct." LML has lost a large customer, in this case we'll analyze what impact that may have. Note: in this part of the case do not worry about including the evaluation of state jurisdictions we will consider the federal jurisdiction only.

In addition to the facts below:

The projected income schedule (realization analysis below) projects organic growth beginning in 2022 after stemming the decrease in pre-tax book income.

A significant customer declared bankruptcy in 2020; therefore, the Company wrote off all accounts receivable from this customer and saw a considerable decline in revenue directly related to the customer loss. The Company is considering the exclusion of such expense when evaluating whether future income is objectively verifiable.

The Company does not have a history of operating losses or tax credit carryforwards expiring unused.

The Company has identified the following possible tax-planning strategies:

oSelling and leasing back manufacturing equipment that would result in a taxable gain of $20 million.

oSelling the primary manufacturing facility at a gain to offset existing capital loss carryforwards.

Requirement 1: According to ASC 740, what are the four sources of taxable income?

Requirement 2: How much of the reversing taxable temporary differences (DTLs) may be considered in estimating future taxable income?

Requirement 3: In evaluating the income that LML is projecting to future operations, is LML in a cumulative loss position (assuming LML considers the current year + prior two years)?

Requirement 4: In evaluating the income that LML is projecting related to future operations, the company has projected growth in future projections. Does the evidence of historic losses affect our ability to accept the company's estimate of future growth?

Requirement 5: What other positive or negative evidence do you see in LML's facts that should be considered in the VA discussion?

Requirement 6: In your opinion is there enough evidence to justify that LML record a valuation allowance? If so, for how much? Create the corresponding journal entry?