Can someone clarify when the DTL is revalued with changing tax rates?
I believe always… time of revaluation would be typically at the end of 1 year to adjust for the next year… Same goes for DTA. so typically adjust prior period DTL, DTA and arrive at Delta DTL, DTA. (for change in tax rate between old and new) Calculate DTL and DTA for this period (at new tax rate). Calculate Tax payable for this period (at new tax rate) Calculate tax expense = Tax Payable + Delta DTL - Delta DTA. e.g Arborath Inc. records following details for 20x2 Deferred Tax Asset : 1000 Deferred Tax Liability : 1200 Statutory tax rate: 25% Following details are recorded for 20x3 Temp Diff due to DTA: 400 Temp Diff due to DTL: 600 Taxable Income: 5000 Statutory tax rate for 20x3 and future : 40% Income tax expense for 20x3 is: a. 1800 b. 2320 c. 2000 d. 2200 Try this on this problem above… and lets see some answers…
Did you just make up the temp differences in DTL and DTA for 20x3? Are these numbers the differences caused by a changing tax rate? taxes payable =5000 * .4 = $2000 $2000 +600 -400 equals $2200, answer D? That felt too easy, and is probably wrong.
the answer you have is right. You were lucky that the numbers for 20x3 matched up for the temp DTL difference to show up as 200. (In the exam you would have been granted the full marks… :)) The actual method of solving is: Solution: Net DTL for 20x2: 200 (1200-1000) Adjust upwards for 40%: 200/.25 * .40 = 320 Change in DTL = 320 - 200 = 120 Net Temporary difference due to DTL for 20x3: 200 Delta DTL: 200 * .40 = 80 Tax Payable: 5000 * .4 = 2000 Tax Expense: 2000 + 80 + 120 = 2200 Choice D Hope this explains… CP
In response to your question culley – these are the new Temp Difference numbers for DTA and DTL in 20x3 – because of differences between Tax and Financial reporting. that is why I said you were lucky that the difference was 200, and that added up to an answer choice as well… CP
Thanks CP. I need to reread this section… More than once.
HI, Are these terms talking about taxable income or the tax itself? Temp Diff due to DTA: 400 Temp Diff due to DTL: 600 Thanks! Steve
They are not the tax itself… These are the temporary differences identified… because of the company’s financial situation… and need to be adjusted into the tax statement.