A company reported DTL of $500,000 and DTA of $350,000. If tax rates change and the company continues to grow, using the liability method of accounting for deferred taxes will most likely result in: A) increased equity if tax rates increase B) increased equity if tax rates decrease C) obviously wrong D) obviously wrong.
b – discussed before TExp = TPay + Delta DTL - Delta DTA Under current TExp = TPay + 150 Say tax rate fell from 50% to 40% TExpNew = TPay + 150/.5 * .4 = TPay + 120 TExp - TExpNew = 30 --> which will go into increased Equity through NI. CP
Thanks! Would the answer be different though if the company didn’t have a sustainable growth (as it has in this question where we treat DTL as Equity) and the DTL would eventually be paid?
This has nothing to do with sustainable growth adn treating DTL’s as equity (an abomination!)… Let’s say these all DTA/DTLs reverse in 2 years. The net amount you owe is $150K. If this was based on a 30% tax rate and it drops to 20% you will only pay 2/3rds of the net liability, or $100K. This savings is netted against income tax expense on the income statement reducing it, and thus pumping up retained earnings.
oh, i see now. i was totally confused by this"company continues to grow, bla-bla-bla". Thanks a lot for your help guys!!!