Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. If the tax rate decreases, the balance sheet values of these deferred tax items will:
Firm 1 Firm 2
A)
increase. decrease.
B)
increase. increase.
C)
decrease. decrease.
Using hypothetical numbers
ITE = $1,000
ITP = $2,000
If DTA ITE < ITP
$1,000 < $2000
DTL ITE > ITP
$2,000 > $1,000
If tax rates decrease for the DTA, ITP will decrease so the value of the asset decreases.
Where I have trouble is the DTL.
If tax rates decrease, ITP will decrease so why doesn;t the value of the DTL increase? Since there is a bigger difference ($2,000 - $800) instead of ($2,000 - $1,000)
The answer was C