Fashion Designs Inc FD is a manufacturer of high end

#3239
Fashion Designs, Inc. (FD) is a manufacturer of high- end women’s clothing. The firm is
involved in the manufacture and design of the clothing. FD has been in this business for many
years and has historically reported strong earnings. However, its earnings have been declining
in recent years. In the two years prior to the current year, it reported only a very small net
income. In the current year, it incurred a $ 10,000,000 loss due to several factors: • The
economy as a whole was in a slump.• There is a general consensus among buyers that its
designs are becoming dated and are not appealing to the new generation of consumers.
However, there are a few buyers that still like the designs by FD. In fact, FD currently has nearly
completed the negotiations for a large contract with one of its primary buyers. The management
of FD has begun an overhaul of the business to address buyer concerns. Unfortunately, this
process will take some time— possibly several years. And, of course, there is uncertainty about
the feasibility of any turnaround plan for the business. To make matters worse, FD is facing a
discrimination lawsuit that could ultimately result in a large payout. Fashion Designs is a U. S.
GAAP reporter and has no book- tax differences. Because the firm incurred a net operating loss
this year and has had very little net income in the two preceding years, it will record a deferred
tax asset for the NOL carryforward. Based upon your judgment, should Fashion Designs record
a valuation allowance to offset its deferred tax asset? If so, should it record a full valuation
allowance (i. e., the valuation allowance amount would equal the deferred tax asset amount) or
just a partial valuation allowance? If a partial allowance, what percentage of the deferred tax
asset should it offset with the allowance? Justify your answer. (Consider consulting paragraphs
21 and 22 of FASB ASC 740- 10- 30.)View Solution:
Fashion Designs Inc FD is a manufacturer of high end

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