is an expense resulting from current period pretax income and change in deferred taxes. True or false? Why?
From taxable income and deferred taxes. Pretax income is on your IS, taxable income is on the tax report. Income tax expense = taxes payable per the taxable income + change in DTL - change in net DTA.
So you are saying it’s false.?
You can calculate the income tax expense if you have the effective tax rate and the pretax income, but it has nothing to do with DTL and/ or DTA. You can calculate income tax expense from taxable income and DTL and or DTA, if you have the statutory tax rate and, eventually future statutory tax rate if you know the statutory rate is going to change in the future, that would affect DTA and DTL. I guess I’m saying the statement is false.
This is one of four answers in a schweser practive exam question which asks for LEAST accurate statement about income tax. Another one is: A deferred tax liability is a balance sheet amount related to the difference between tax expense and taxes payable that is expected to be recovered from future operation. Which one do you choose?
As false? or least accurate? the first one. The second one seems true, although a DTL comes about postponing a tax liability from the current period to the future period (like using SL on IS and DDB for taxes). But yes, this is a difference that is added to taxable income when is expected to reverse in the future. In fact all the time is added back, but for analysis purposes, when it is expected never to reverse is considered equity. A DTL makes income expense higher.
and yes, DTLs are on the BS.
It asks for least accurate. The answer chosed “income tax expense is …” one. As to the second one, it is definition of DTA, not DTL. I agree here. But I see the first one as wrong as exactly what you explained previously.
The position on the BS is DTL&A, but DTA saves you from paying taxes in the future: you deduct more on the IS than for taxes (warranty expense, bad debt) and that is making taxes payable in the current period higher. DTAs are then deducted from the taxes payables in arriving at the income expense, and is making it smaller.