Deferred Taxes Question

CFA Level I
#1

Deferred Tax Assets Deferred Tax Liability 1 50K 200K 2 300K 400K 3 85K 50K 4 170K 115K If the corporate tax rate decreases, and nothing else changes, which company will most likely experience a largest decrease in equity? Can someone please explain?? The answer is D

#2

you are looking for the largest DTA-DTL, net positive DTA-DTL means that you have a tax asset. If tax rates decrease then your asset goes down, hence equity goes down.

#3

LongOn, in reference to where you mentioned asset drops when tax rates drop, by asset you mean DTA right? would DTA and DTL both decrease when taxes decrease?

#4

niraj_a Wrote: ------------------------------------------------------- > LongOn, > > in reference to where you mentioned asset drops > when tax rates drop, by asset you mean DTA right? > > > would DTA and DTL both decrease when taxes > decrease? yes

#5

just think of the accounting equation… A=L + E now, what would cause E to decrease? a decrease in “A” or a decrease in “L”?

#6

a decrease in L would cause E to go up…all else being equal.

#7

exactly, so the only things that could cause equity to decrease (all else equal) would be an increase in L or an decrease in A