Hello!
I will be grateful for your help on the deferred tax assets and the tax rate change effect.
The task is to find how, in case of decreased tax rate, the change in deferred tax asset account affects net income, income tax expense, tax payable, cash from operating activities, etc. - which items are decreased. I am trying to understand why, if a tax rate is decreased, the income tax expense goes up.
Please, take a look at my reasoning and help me to understand my mistake.
For example:
Tax rate 35%
FINANCIAL ACC-G
Pre tax income 400
Temporary difference (190)
Pre tax income 210
Income tax expense 73,5
___________________
Net Income 136, 5
TAX ACC-G
Income 400
Temporary difference 0
Taxable income 400
Tax payable 140
__________________
Net Income 260
Decrease tax rate to 30%
FINANCIAL ACC-G
Pre tax income 400
Temporary difference (190)
Pre tax income 210
Income tax expense 63
___________________
Net Income 147
TAX ACC-G
Income 400
Temporary difference 0
Taxable income 400
Tax payable 120
__________________
Net Income 280
Thus I see that income tax expense goes down if the tax rate is decreased, as well as tax payable and deferred tax asset.
Journal entries tax 35%:
Dr Income tax expense (+E) 73,5
Dr DTA (+A) 66,5
Cr Tax Payable 140
Dr Income tax expense (+E) 63
Dr DTA (+A) 57
Cr Tax Payable 120
The only way income tax expense can increase is when tax payable stays the same as it was at 35% rate.
Please, help me to see my mistake.
Thank you very much!
EDIT:
For example, the balance in DTA was 10K at 35% tax rate. If the tax rate has changed to 30%, then the balance in DTA should be 8571. To get there I have to Credit DTA account (decrease DTA) for 1429. If I credit DTA for 1429, then I have to debit interest tax expense by the same amount and thus increase that expense. Is this correct? If yes, I don’t understand the logic - what happens to the tax payable in this case? Thank you!