For year 2004, SEH’s pretax income is $800,000, taxable income is $440,000. The difference will reverse accoreding to the following schedule: $120,000 in 2005, $60,000 in both 2006 and 2007, $120,000 in 2008. The income tax rate was: 35% for 2004 and 2005; 30% for 2006 and 2007; 25% for 2008. What’s balance of SEH’s deferred tax account at the end of 2005 and determined whether the balance is an asset or a liability? A. DTL 66,000 B. DTA 66,000 C. DTL 84,000 D. DTA 84,000

The answer should be C. 1) They had a DTL at the beginning of 2005 of $360k*0.35 = $126k ($360k comes from $800k-$440=$360k) 2) Since they will pay taxes for $120k worth of income, that mean they will pay $120k * 0.35 = $42k 3) If they pay $42k, their DTL at end of 2005 should be $120k - $42k = $84k, thus answer C.

Not C

Dreary - Why didn’t you incorporate tax changes in 2006, 2007 and 2008 ? Here is what I think (and I know I am wrong)… but if someone can point out why this is wrong— 1. Difference in taxable income and f/s income = 800-440 = 360K 2. 120K reverses in 2005 --> DTL2005 = 42K 3. 60K reverses in 2006 @ 30% —>DTL2006=60*0.3=18K 4. 60K reverses in 2007 @ 30% —>DTL2007=60*0.3=18K 5. 120K reverses in 2008 @ 30% —>DTL2008=120*0.25=30K 6. There is no information that when the remaining 60K will reverse ?—> So, using 2004 tax rate-- the corresponding DTL=60*0.35=21K Therefore, at end of 2005 DTL = 18K+18K+30K+21K = $87K Now where am I wrong ? Is the answer A. Because if the answer assumes that remaining 60K income difference got reversed in 2004… then answer will be = 18K+18K+30K = 66K

thunderanalyst Wrote: ------------------------------------------------------- > Dreary - Why didn’t you incorporate tax changes in > 2006, 2007 and 2008 ? > > Here is what I think (and I know I am wrong)… > but if someone can point out why this is wrong— > > 1. Difference in taxable income and f/s income = > 800-440 = 360K > 2. 120K reverses in 2005 --> DTL2005 = 42K > 3. 60K reverses in 2006 @ 30% > —>DTL2006=60*0.3=18K > 4. 60K reverses in 2007 @ 30% > —>DTL2007=60*0.3=18K > 5. 120K reverses in 2008 @ 30% > —>DTL2008=120*0.25=30K > 6. There is no information that when the remaining > 60K will reverse ?—> So, using 2004 tax rate-- > the corresponding DTL=60*0.35=21K > > Therefore, at end of 2005 DTL = 18K+18K+30K+21K = > $87K > > Now where am I wrong ? > > Is the answer A. > Because if the answer assumes that remaining 60K > income difference got reversed in 2004… then > answer will be = 18K+18K+30K = 66K > Here is what I think (and I know I am wrong) ------> effen cool

Not sure I understand the question! We are at end of 2005, and I assume we only know about 2005 tax rates. Is it usual that you know future tax rates the way they laid them out? If so, I’ll have to rethink the answer.

Yes, that’s what confused me as well. Tha answer is A. So in any year, if we know future years’ tax rate, we have to adjust this year’s deferred tax balance. Is it correct?