# DTA and DTL

Pg 66 Q 181 of schwer practice exam II Lyon company had pretax earning of \$150 mill in its first year of operation. pretax income included -25 million of interest income from tax free municpal bonds -35 millon of accrued warranty expense that is not yet deductible 15 million of deductible depreciation expsense that is not yet accrused. Tax rate is 40%. calculate year end amount of income taxes payble that company should record A 58 million B 60 million C 70 million I could not hell follow how to account 35 and 15 million (from explanation). pl elaborate.

not yet accrused??? don’t know what you mean municipal bond interest shouldn’t matter as tax free with DT’s, warrenty expenses are deducted from revenue as expected warranty expense incurred on income statement. on tax report, only ACTUAL warranty exp incurred. the depreciation bit, i’m not sure what you mean

-25 million of interest income from tax free municpal bonds ----> The 25M was included (deducted) from Pre-tax income, so you had it back. -------------------- -35 millon of accrued warranty expense that is not yet deductible —> This 35M was paid (expensed), but not yet deductible, so it’s a DTA. --------------------- 15 million of deductible depreciation expense that is not yet accrused. —> This 15M was deducted, but not yet accrued, so it’s a DTL. --------------------- Tax Payable = Actual amount of money you owe based on current income you earned during the current year = 150M + 25M (cuz it’s not taxable, so add it back) = 175M * 0.40 = 70M. I’ll pick C as the answer.

150 -25 +35 -15 145*.4=58

^ Isn’t that the tax expense you just calculated, June2009?

i also got 58

I also get 145 as the taxable portion by adding 35 for warranty expense, subtracting muni interest, and subtracting depreciation. 145*.4=58

Yeah, A is probably the correct answer now that I think about it. So what’s the correct answer.

Per the exam volume 1 book, A is the correct answer