Firm has the following info for 2002: DTA: 1000 DTL: 1200 Tax rate: 20% For 2003: Timing difference in the year giving rise to deferred tax assets: 400 Timing difference in the year giving rise to deferred tax liability: 600 Tax rate: 40% Taxable income: 5000 What is the tax expense for 2003? a. 1800 b. 2320 c. 2000 d. 2200 ?
The easiest way is to deal with the net positions: 2002: net DTL position=1200-1000=200, equivalent of a timing difference of 200/.2=1000, which in terms of the 2003 tax rate is a DTL of 1000*.4=400 In 2003, you also have a net difference of 600-400=200, creating a DTL of 200*.4=80 Total net DTL position in 2003:400+80=480, an increase of 480-200=280 Add the taxes payable of 5000*.4=2000 The tax expense should be 2280 However, this is none of the choices offered. I am pretty sure I’ve seen this problem discussed before, and it had either a different rate in 2002, or the positions creating the temporary difference the other way around.
Yes you’re right sorry typo there. 2002 tax rate should be 25%
2002: net DTL position=1200-1000=200, equivalent of a timing difference of 200/.25=800, which in terms of the 2003 tax rate is a DTL of 800*.4=320 In 2003, you also have a net difference of 600-400=200, creating a DTL of 200*.4=80 Total net DTL position in 2003:320+80=400, an increase of 400-200=200 Add the taxes payable of 5000*.4=2000 The tax expense should be 2200
i think its B. if first year tax =25% increase in first year def. tax liability = 200*.4/.25 - 200 = 120 this years def. tax liability = 200 total tax = = 2000 so tax expense = 2320