san-br
October 9, 2016, 4:57pm
#1
Hi - following situation:
Taxable income = 100,000
Pretax income = 120,000
Current tax rate = 20%
Tax rate post reversal = 10%
What is the tax expense?
I thought = 0.2*120,000 + (120,000-100,000)*0.1 = 26,000
Answer seems to be wrong. Anyone idea why?
Thanks
It says taxable income is 100,000, not 120,000. So,
0.2 x 100,000 + (120,000 - 100,000) x 0.1 = 22,000
Maybe I’m wrong.
What is post reversal? Is there info missing?
Tax= tax rate * taxable income
Also wanted to ask that, but was too afraid to realize level 1 curriculum has changed that much lol.
cpk123
October 15, 2016, 8:03am
#6
since pre-tax income was 120000 and taxable income was 100000 -> you had 20000 of DTA in play.
Now Tax = Tax Rate * Taxable Income = 0.2 * 100000 = 20000
Also once the tax rate reduces to 10% - you get a benefit ? (Delta DTA * New Tax Rate) = -0.1 * 20000 = -2000
So net tax = 18000?
cpk123:
since pre-tax income was 120000 and taxable income was 100000 -> you had 20000 of DTA in play.
Now Tax = Tax Rate * Taxable Income = 0.2 * 100000 = 20000
Also once the tax rate reduces to 10% - you get a benefit ? (Delta DTA * New Tax Rate) = -0.1 * 20000 = -2000
So net tax = 18000?
Not sure about the question but I think it’s a DTL not a DTA. If the reported income for tax purposes (taxable income) is lower than the income reported in the financial statements (pretax income), the firm hasn’t paid the taxes on higher income ‘financial’ income yet, so that’s a liability.