Selected information from Kentucky Corp.’s financial statements for the year ended December 31 was as follows (in $ millions): Property, Plant & Equip = 10 Accumulated Depreciation = (4) Deferred Tax Liability = 0.6 The balances were all associated with a single asset. The asset was permanently impaired and has a present value of future cash flows of $4 million. After Kentucky writes down the asset, Kentucky’s tax accounts will be affected as follows (the tax rate is 40%): A) deferred tax liability will be eliminated and tax assets will increase $1.4 million. B) deferred tax liability will be eliminated and deferred tax assets will increase $200,000. C) income tax expense will decrease $800,000. D) there will be no effect.
It should be C. PPE=10 Depreciation=4 PPE - Depreciation = Net PPE = 6 The asset is impaired to 4, this would be a loss of 2. Since for tax purposes the impairment is recognized only at asset disposal, Kentucky Corp will not be able to recognize the loss, and will built a tax asset of 2*0.4=800,000. Tax assets reduce income tax expense by 800,000.
Answer: B) deferred tax liability will be eliminated and deferred tax assets will increase $200,000. A permanently impaired asset must be written down to the present value of its future cash flows. The asset’s carrying value of ($10 - $4 =) $6 million must be reduced by $2 million to $4 million. An impaired value write-down reduces net income for accounting purposes, but not for tax purposes until the asset is sold or disposed of. At a 40% tax rate, the eventual write-down for tax purposes of $2 million will be worth $800,000 in deferred tax assets. The $600,000 deferred tax liability is eliminated and a deferred tax asset of $200,000 is established. What I don’t understand is the “2 million to 4 million” part… Why is there a range?
It’s not a range, it’s a reduction. The number will decrease by $2 mln. So, $6 - 2 = $4 mln
ah. son of a bitch… thanks.