A new president is elected in November 2004. In early 2005, he enacts his tax proposal that includes an increase in the corporate tax rate from 35% to 50%. Use the information below to compute the tax expense for 2005. 2005 taxabke income= $5000 Deferred tax asset year end 2004 = $2000 Deferred tax liability year end 2004 =$1000 2005 temporary differences creating deferred tax liabilities= $600 2005 temporary differences creating deferred tax assets = $200 A 2272 B 2500 C 2700 D 3128 I keep gettin 3128 while shweseris saying the answer is 2272 the question is driving me crazy. Anyways thanks a mil
i am getting 1472 Net 2004 DTA = 1000 @ 35% Net 2005 DTL = 400 @ 50% already Tax Payable = 5000 @ 50% = 2500 Tax expense = Tax payable + net DTL - net DTA = 2500 + 400 - 1000 / .35 * .5 = 2900 - 1428 = 1472
2004 DTL should be adjusted to $1000/0.35 = $1429 2004 DTA should be adjusted to $2000/0.35*0.5 = $2857 2005 tax expense = ($5000 + 600 - 200) * 0.5 + $429 - $857 = $2272 It took me a while to get it!
Tax expense = (Taxable Income + DTL - DTA) * (Tax rate) + [(new rate/old rate)*DTL - DTL] - [(new rate/old rate)*DTA - DTA] In the above example: Tax expense = (5,000 + 600 - 200) *0.5 +[(0.5/0.35)*1,000 - 1,000] - [(0.5/0.35)*2,000 - 2,000] = 2,700 + 429 - 857 = 2,272 Hope this helps
I am totally confused now, Income tax expense = taxes payable + Change in DTL- Change in DTA or DTL = (income tax expense-taxes payable)* tax rate --> so why are you guys multiplying DTL and DTA with tax rate in the calculations of income tax expense again. Isn’t it double taxing ?? Here is what I think, Change in DTL due to tax change = 1,429-1000=429 Change in DTA due to tax change = 2,857-2000=857 Income tax expense = 2500 + (600-200)+(429-857) = 2,472 Some one please clarify. Dreary and FISHER, why did you do-- 2500+(600-200)*0.5+(429-857)= 2,272 ??
Temporary differences are gross by definition.
you mean there is difference when question states, 2005 temporary differences creating deferred tax liabilities =600 VS. deferred tax liability at end of 2005 is $600 ??? Thanks
Yes. DTA and DTL are after-tax impacts, while temporary differences are before taxes.
My bad!!. question says Temporary differences CREATING deferred tax liability is… Thanks man !! 
It should say: Temporary differences which will result in recording a deferred tax liability are blah blah.