A new president is elected in Nov. 2004. In early 2005, he enacts his tax proposal that includes an increase in corporate tax rate from 35% to 50%. Use the information below to compute tax expense for 2005. 2005 taxable income = $5000 DTA year end 2004 =$2000 DTL year end 2004 =$1000 2005 temporary differences creating DTL= $600 2005 temporary differences creating DTA= $200 A. $2,272 B. $2,500 C. $2,700 D. $3,128 Can someone show the calculation, the answer is A.
5000*.5 = 2500 2000/.35 = 5714.29 income for 2004 asset 5714.29*.5 = new DTA of 2857.14 1000/.35 = 2857.14 income for 2004 liability 2857.14*.5 = new DTL of 1428.57 2857.14 - 2000 = 857.14 added to asset 1428.57 - 1000 = 428.57 added to liability 857.14 - 428.57 = 428.57 subtracted from taxes of 2500 600 * .5 = 300 liability 200 * .5 = 100 asset 200 liability added to 2500 - 428.57 = 2271.43
Net DTA at 2004 year end: 2000-1000=1000, which in terms of 2005 (at 50% taxes) are converted to being 1,000*50%/35%=1,428.57, that is a net change in DTA of 1,428.57-1000=428.57 In 2005, the temporary differences are 600-200=400 creating DTL, that is a DTL of 400*50%=200 Tax expense = taxable income*statutory tax+change in DTL-net change in DTA=5,000*50%+200-428.57=2,271.43~2,272