firm acquires a 120000 asset with 4 years useful life and no salvage value. Firm generates 50000 each year. Tax rate is 40%. Firm will appreciate the asset over 3 years on straight line basis for tax purposes and 4 years straight line for Financial reporting. Suppose tax rate rise during year 2 to 50%. What will be the income tax expense in year 2?

11000? but i dont think i am correct lol

Any tax rate rises, that are known today, should take place from the beginning of the time it is known So effectively your tax rate today is 50% too. Firm’s depreciation 1 = 40k each year Taxable Depreciation = 30k So in future you’ll have Pretax Income > Taxable payable, hence create a DTL today. DTL will be for 10k (1-50%) = 5000k Man I dont know what I am doing on this question. I give up.

ssdnola Wrote: ------------------------------------------------------- > firm acquires a 120000 asset with 4 years useful > life and no salvage value. Firm generates 50000 > each year. Tax rate is 40%. Firm will appreciate > the asset over 3 years on straight line basis for > tax purposes and 4 years straight line for > Financial reporting. > Suppose tax rate rise during year 2 to 50%. What > will be the income tax expense in year 2? 10,000 ? could be wrong. I did: revenue = 50,000 depn expense = 30,000 EBT = 20,000 taxes = 20,000 * .5 = 10,000 net income = 10,000

I’ll say 5k

Or this question it is not very clear or it is me that I need to sleep as I slept 4 hours in 2 days.

Total asset value =120K Depreciation expense on T/B (tax basis) = 40k (1,2,3 years) Depreciation expense on F/S (fianc stat) = 30K (1,2,3,4 years) Revenue = 50K First year DTL = 10K*0.4=4K Second year, Income tax expense=(50-40)*0.5+(40-30)*0.5+change in carryover DTL = 5+5+(4*0.5/0.4-4)=10+1=11K DTL is a liability which you pay in future. If tax rate increase your liability increases too, and if the tax rates drop it reduces your DTL (and vice-versa for DTA)

Yup Thunderanalyst got it right. Good job. the reason why i posted this question becuase the answer that was given was confusing. The given answer: Taxes payable in year 2 is now taxable income * 50% = 10000 * 50% = 5000. The deferred tax liability at the end of year 1 was 4000 ( before restatement under new tax rate). Tax expense= taxes payable+ increase in deferred taxes= 5000+ (10000-4000)=11000. I did not understand their answer at all. Now i got it after i saw thunderanalyst answer. Thank you by the way

or deffered tax liability carried = {depriciation(book) - depriciation(tax)} * tax rate = 400 change in DTL = DTL* new_tax_rate/old_tax_rate - DTL = 400*(.5/.4) - 400 = 100 tax exepence in year two is 1000 (tax expence for this year) + 100(change in DTL) = 1100

but does not tax expense for year 2 needs to include the DTL for the year after chage? we change 4000 to 5000 after tax rate change for the 1 year. Second year also we have 5000 DTL total 10000. so the change in DTL is 5000 (10000-5000) that occured in year 2. Please help explain. thank you

the answer is 10000

no it is 11000