This is an excerpt from Schweser Practice Exam Vol 1, Exam 3 Afternoon Session Q60.
A company had DTA of $1,000 & DTL of $5,000 last year and tax rate of 50%. There is a news that tax rate will decline to 40%. What will be changes in DTA, DTL and income tax expense ?
The solution stated : DTA will be reduced by $200 {$1,000 x [(40%-50%)/50%]= - $200} and DTL will be reduced by $1,000{$5,000 x [(40%-50%)/50%]= - $1,000)}. Hence, income tax expense will be reduced by $800.
My question : Why the reduction in DTA is not $100 [$1,000 x (40%-50%)] and the reduction in DTL is not $500 [$5,000 x (40%-50%)] ? so that the income tax expense is reduced by $400 ($500 - $100) ?
Anyone can help me ? Thanks in advance !