this is good practice: A company purchased a new pizza oven directly from Italy for $12,675. It will work for 5 years and has no salvage value. The tax rate is 41 percent, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35 percent in years 1 and 2, and 30 percent in year 3. For purposes of this exercise ignore all expenses other than depreciation. Assume the tax rate for years 4 and 5 changed from 41 percent to 31 percent. What will be the deferred tax liability as of the end of year 3 and the resulting adjustment to net income in year 3 for financial reporting purposes due to the change in the tax rate? Deferred Tax Liability : Net Income A) $1,572 : $747 B) $1,039 : $507 C) $1,572 : $507 D) $1,039 : $747
Choice C Tax Reporting Depr 4436 4436 3803 0 0 Fin. Reporting Depr 2535 2535 2535 2535 2535 Cumulative DTL 779 1559 2078 DTL each period = (Depr Tax - Depr FR) * .41 Since rate changes at the year 4 DTL in Year 3 end will change from 2078 to 2078 * .31/.41 = 1571 Difference in NI because of this change = 2078 - 1571 = 507 Am I right, lola? CP
yup, you got it. nice work, cpk123. You’ve been on a roll recently, keep it up. good job!
How did you calculate the Tax Reporting Depreciation of 4436? I am not getting that answer.
Never mind, i figured it out. It’s late and I guess I am not focusing anymore
Choice B or C? SL dep. in financial statement: 2535 2535 2535 2535 2535 Accelarated dep. in tax return: 4436 4436 3803 0 0 Pretax income in financial statement: 4657 4657 4657 4657 4657 Tax expense in financial statement: 1909 1909 1909 1909 1909 Taxable income in tax return: 2756 2756 3390 0 0 Tax payable in tax return: 1130 1130 1390 2949 2949 DTL each year: -780 -780 -520 0 0 Accumulate DTL in year 3: -780-780-520 = 2078.7 Because of decrease tax rate from 41% to 31% --> DTL at end year 3 decreased to 2078.7*0.31/0.41 = 1572 --> DTL amount change at end year 3 is 1572-2078.7 = - 507 Net income of year 3 in case of ignoring tax rate changed: 4657 - 1909 = 2748 NI incase of tax rate reduced frm 41% to 31%: 2748 - 507 = 2241
Maybe there is no choice for both DTL and NI
Thu Please read the question. It is asking for Deferred Tax Liability : Net Income and pls look at my solution above. Choice C is right.
Maybe u r right but could u pls show me if i have calculated something wrong above? Actually the DTL changed amount at end of year 3 should be 507 not 1572
i also got C. thanks for helping us stay in shape, lola!
Thuy Please read the question asked again: What will be the deferred tax liability as of the end of year 3 and the resulting adjustment to net income in year 3 for financial reporting purposes due to the change in the tax rate? They are asking for Change in NI and the DTL itself. HTH CP
Dear cpk13, I am sorry for my so wrong mistake. I don’t know why i alway chew in mind that income tax expense equal to net income. This is vocabulary mistake because i am not English native speaker. So sorry u all. Yes, any change in (DTL - DTA) equal to change in NI, right? Thank u very much for reminding me “read the question again” but if u should have reminded me “check yr vocabulary again” i will not spend so much time reading LOS 44.d again and again. Hope to receive yr discussion further more because i am a newbie here 
Correct answer is number C but 12,675 USD per pizza oven rather expensive
Thu Thuy Wrote: ------------------------------------------------------- > Correct answer is number C > > but 12,675 USD per pizza oven rather expensive Corporate Finance is the next session.
FYI, $16,000 USD = 256,000,000 Dong (Vietnamese currency)
I don’t think so Char-Lee Price purchased 12,675 directly frm Italy may be cheap but freight charge minus tariff and other fee to Vietnam may be one third higher or double
um ok? Thuy, I was just showing what the current market exchange rate was for the USD to Dong…
Yeah Char, But u r kidding Yr concern is Vietnam government concern right now. USD has been down seriously compared with Dong these days and caused many difficulties for Vietnam export business. But maybe it’s the time for import equipment because cost is down and import price is cheaper, right?