Change in tax rate effect on previous DTL/DTA

Hi,

sorry fro all the questions on tax, i was going OK until i hit this subject.

purchase of $25,352 for 5 years and has no salvage value. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. Annual revenues are constant at $14,38, If the tax rate for years 4 and 5 changes from 41% to 31%, what is the deferred tax liability as of the end of year 3?

the answer for the above uses a tax rate of 31% - however they are only asking for the tax liability in yr 3 when the rate was 41%. why is this?

thank you

Once the new tax rate is substantially enacted, you use it.

thank you… again… much appreciated.

sorry i still keep getting tripped up… the answer is given below and as shown for years 1-3 the old tax rate applies… what i cant get my head around is that the tax asset/liability is established at the lower rate, yet when tax rates changes, we go back in time and change the DTL/DTA?

many thanks in advance

Straight-line depreciation = $25,352 / 5 = $5,070. Income (years 1, 2, and 3) using straight-line depreciation = $14,384 − $5,070 = $9,314.

Accelerated depreciation (years 1 and 2) = 0.35($25,352) = $8,873. Income (years 1 and 2) = $14,384 − $8,873 = $5,511.

Accelerated depreciation (year 3) = 0.3($25,352) = $7,606. Income (year 3) = $14,384 − $7,606 = $6,778.

Cumulative difference in income at end of year 3 = 3($9.314) − [2($5,511) + $6,778] = $10,142.

DTL value at new tax rate = 0.31($10,142) = $3,144.