Graphics Inc. has a deferred tax asset of 4,000,000 on its books. As of December 31 it is probable that 2,000,000 of the deferred tax asset's value will never be realized because of the uncertainty about future income. Under US GAAP, Graphics Inc should ________.
1) Reduce the deferred tax asset account by 2,000,000
2) Establish a valuation allowance of 2,000,000
3) Establish an offsetting deferred tax liability of 2,000,000