# Deferred Tax Asset v. Deferred Tax Liability

The Hizzle Corporation faced a 50% marginal tax rate last year and showed the following financial and tax reporting information: - Deferred Tax Asset of \$1,000 - Deferred Tax Liability of \$5,000 Based only on this information and the news that the tax rate will decline to 40%, The Hizzle Corporation’s: A. deferred tax asset will be reduced by \$400 and deferred tax liability will be reduced to \$2,000 B. deferred tax liability will be reduced by \$1000 and income tax expense will be reduced by \$800 C. deferred tax asset will be reduced by \$200 and the income tax expense will be reduced by \$1, 000 D. Income Tax expense will be reduced by \$800 and the deferred tax liability will be reduced by \$2000 …Wasn’t sure how to deal with this, too. Any explanations would be great. I’ll follow up with the answer shortly!

C multiply by (50-40)/50

Easiest way to do these is to calculate the percent change in the tax rate. You’ve gone to 40% from 50%, so the new rate is 80% of the old rate. Therefore, DTLs and DTAs need to be shown as 80% of their original book value. You go to \$800 and \$4000 respectively, or answer C

C The initial difference that produced the DTA was 2,000, new DTA 800, decreased 200 The initial difference that produced the DTL was 10,000, new DTL 4000, decreased 1000

B…when the tax rate decreases you need to adjust the DTL and DTA. To find the value of the new DTL and DTA you just do new tax rate/old tax rate*orginal DTA or DTL amount…for this (.4/.5)*5000 = 4000 and (.4/.5)*1000 = 800. Remember that tax expense = taxes payable + change in DTL - change in DTA. So in this example the DTL was reduced by 1000 and the tax expense was lower by 800 as per the equation.

Comrades, The explanations make sense, but are you sure you want to select “C”?

My goodness, I saw 1000, I said to myself this is it! It is B, DTA reduces income tax expense by its value:))

u wont miss it on the real exam though…that is what i keep telling myself.

I hope, though I have this tendency of doing exams in one hour 30 minutes top, I get borred so easy!

I need to catch a cold or something, because you guys are sick.

Tax expense = taxes payable + change in DTL - change in DTA. Since in this example we have a tax reduction both DTL and DTA are reduced. In other words Income Tax Expense = Taxes payable + [(.4/.5)*5000-5000] - [(.4/.5)*1000-1000] = Taxes payable - 1000 + 200 = net change of -800.

i thought that when taxes decrease DTL are adjusted because it is a liability to be paid later and the new rate is lower… and since a DTA is due to taxes already paid at the higher rate then there is no adjustment… so I’d say (B) (50-40)/50 * 5,000 = 1,000 reduction

Both DTA’s and DTL’s are adjusted for changes in taxes