Assume GAAP: An analyst gathered the following data: Company DTA DTL A 50,000 200,000 B 300,000 400,000 C 85,000 50,000 D 170,000 115,000 If interest rates decrease, which company will have the largest decrease in reported equity? Can someone please explain how you would solve this?

B

if rates decrease, your DTL decrease and so does your DTA however, the company with largest decrese in reported equity is the company with the largest decrease in NI. so largest decrease in NI will come for a company whose TAX expense is teh greatest. Tax Expense = payable tax + (delta)DTL - (deltA)DTA take out payable tax out of equation you left with the greatest positive difference between DTL and DTA So the company that has greatest difference between these two is company A. hence A

The company that has the largest net deferred tax asset will have the largest decrease in reported equity

I hope the question is asking for % and not absolute difference. cuz then I;'d go with B.

da0618 - you are right, can you please explain ? Answer given is D, Thank you.

from tax section is tax rates decreases & DTA is larger then DTL, will have the largest decrease in equity

You take DA - DL = equity, so whomever has the highest net equity will have the largest decrease. Not sure I used the wording right but that is how i got D.

Thanks. Got it!!

If interest rates decrease, does that mean tax rates decrease?

So the correct answer is? I think D

Yes, the answer is D

could someone please explain this already?

pepp Wrote: ------------------------------------------------------- > could someone please explain this already? Pepps, see the above comment of amberpower. As she said you take DA - DL = equity, so who has the highest net equity will have the largest decrease. Make sense? It is pretty logical

Why does it say interest rates though, shouldn’t the question say taxes?

I bet it says taxes not interest rates. Interest rates have not that much to do with DTAs and DTLs.

amberpower, that’s a good question. What does this have to do with interest rates?

this question should mean tax rates and has nothing to do with interest rates. CP

Phew, I was going nuts!

pepp Wrote: ------------------------------------------------------- > if rates decrease, your DTL decrease and so does > your DTA > however, the company with largest decrese in > reported equity is the company with the largest > decrease in NI. so largest decrease in NI will > come for a company whose TAX expense is teh > greatest. > > Tax Expense = payable tax + (delta)DTL - > (deltA)DTA > take out payable tax out of equation > > you left with the greatest positive difference > between DTL and DTA > > So the company that has greatest difference > between these two is company A. > > hence A Pepp, I used the same approach but why do you/me get wrong. Ambers’ explanation is intuitively correct but I am sure during the exam i won’t have holistic view! S