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Deferred Tax Effect on Net Income

Please someone help me with this exercise. My question is written in the end of it.
The following information is available for a company that prepares its financial statements according to US GAAP:


Deferred tax assets

Deferred tax liabilities

Valuation allowance

The overall effect on 2015 net income from the above changes in the company’s deferred tax accounts is closest to a:

  1. $200,000 increase.
  2. $300,000 increase.
  3. $200,000 decrease.


A is correct. A valuation allowance reduces the value of the deferred tax assets under US GAAP, so the total change in net income as a result of the changes in the three accounts can be calculated as follows:

Change in Account from 2014
Effect of Change on Net Income

Dollar Effect

Deferred tax assets
$ 200,000 increase

Deferred tax liabilities
$100,000 decrease

Valuation allowance
$100,000 increase

Overall effect:
A net increase of:

How come an increase in DTA increase Net Income reported? Isn`t it supposed to be lower since we actually have created an incremental DTA because EBT are actually lower on accrual accounting than Tax accounting?

For example:  For Accounting Purposes—-> 12(Revenue) - 2 (Depreciation) =10(EBT)-  1(10%tax)= 9 Net Income 
                       For Tax Purpose—> 12 (Revenue)-1(Depreciation allowed under tax reporting)=11(EBT)-1.1(10% Tax)=9.9 Net Income. (In this case we have a Deferred Tax Asset Created cause we actually paid 1.1 instead of 1 and the Net Income i actually lower 9 instead of 9.9 so why does the exercise says that an increase in DTA increases Net Income?) 

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In your example the increase in tax liability is Deferred Tax Liability, not DTA. Decreasing depreciation will increase the liability.