Deferred Taxes

CFA Level I FRA
#1

"A firm has deferred tax assets of $315,000 and deferred tax liabilities of $190,000. If the tax rate increases, adjusting the value of the firm’s deferred tax items will:

A)

decrease income tax expense.

B)

have no effect on income tax expense.

C)

increase income tax expense "from Kaplan Schweser.

Increase in tax rate would increase DTA and DTL by same %. But as DTA is more than DTL we will have higher DTA. Now if DTA is more than DTL that means we have income tax expense is greater than income tax payable. So, my answer was C.

But the correct answer is A. What am I missing?

#2

We have a net DTA

As we already paid taxes on DTA on the old tax rate, we will save money because now the tax rate is higher.

So it will decease income tax expense (A)

that’s the way I figured it out

#3

Thanks for the reply… according to the formula ITE =ITP + DTL -DTA… now if DTA increase more than DTL (numerically, as DTA is more) ITE will increase but what happens to ITP?

#4

Income tax payable (ITP) will be higher. This amount is calculated with: (net income * Tax rate)

The question says what is the impact on deferred tax items so it should not change anything.