# Income tax expense- CFA website

Hi guys,

The following information is available about a company:

($thousands) 2013 2012 Deferred tax assets 200 160 Deferred tax liabilities –450 –360 Net deferred tax liabilities –250 –200 Earnings before taxes 4,000 3,800 Income taxes at the statutory rate 1,200 1,140 Income tax payable (Current income tax expense) 1,000 900 The company’s 2013 income tax expense (in thousands) is closest to: 1.$1,250.
2. $950. 3.$1,050.

#### Solution

C is correct. Income tax expense reported on the income statement = Income tax payable + Net changes in the deferred tax assets and deferred tax liabilities. The change in the net deferred tax liability is a $50 increase (indicating that the income tax expense is$50 in excess of the income tax payable, or current income tax expense) and represents an increase in the expense. Therefore, the income tax expense = $1,000 +$50 = $1,050. • *My opinion, If I take Tax payable+ Δ DTL- Δ DTA=1000+(-450+360)-(200-160)=870 The problem is that they have negative signs on the Deferred Tax Liabilities; they should be positive. Still cant get it . Would u please explain to me? An account such as Deferred Tax Liabilities should have a positive (credit) balance. For some reason they’re showing Deferred Tax Liabilities as negative numbers. If they show them properly (as a positive numbers), then ∆DTL = 450 − 360 = 90, and, Income\ Tax\ Expense = 1,000 + \left(450 - 360\right) - \left(200 - 160\right) = 1,000 + 90 - 40 = 1,050 1 Like Got it @S2000magician. Many thanks. My pleasure. income tax expense = income tax payable +increase in DTL -Increase in DTA increase in DTA =40 increase in DTL =90 Net effect is Increase in Liabilities = 40-90=-(50) Add is this 50 to the Net Taxes Payable i.e$1000 +50 and the correct answer is 1050

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If i apply this to below example, i will choose answer C, but the answer is A

The following information is available for a company that prepares its financial statements according to US GAAP:

2015 2014
Deferred tax assets $1,000,000$800,000
Deferred tax liabilities $600,000$700,000
Valuation allowance $500,000$400,000

The overall effect on 2015 net income from the above changes in the company’s deferred tax accounts is closest to a:

1. $200,000 increase. 2.$300,000 increase.
3. $200,000 decrease. \Delta = +\Delta DTL - \Delta DTA = \left(\$600,000 - \$700,000\right) - \left[\$1,000,000 - \$800,000 - \left(\$500,000 - \$400,000\right)\right] = -\$100,000 - \left(\$200,000 - \$100,000\right)
= -\$100,000 -$200,000 + \$100,000 = -\$200,000

How do they attempt to justify that A is correct?

This is the answer from CFA website

My error: I misread the question. They’re not asking the effect on tax expense; they’re asking the effect on net income.

Note to self: read the <blessed> question.

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yah, i got it. Many thanks. Lesson

My pleasure.

So normally, both DTL and DTA have positive balance?

Yup.

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