I am unable to folow the tax rate change example in the curriculum.
Carrying value for 2006,2005 and 2004 are 14,000 ; 16,000 ; 18,000 respectively.
Tax base for 2006,2005, and 2004 are 11,429 ; 14,286 ; 17,143 respectively
Differece amounts 2571 ; 1714 ; 857 respectively
The DTL for the 3 years are 771 ; 514 , 257 (Assuming Tax rate to be 30%)
Now letz say tax rate for the year 2006 changes to 25%. The new DTA is (25% x 2571) = 643
The book says 771 to 643 is reduction of 128 and this caused by diffrence in
- dereciation method 2) tax rate change
The benifit of accelerated depreciation is now only (857 x 25%) = 214 (not 257). There is a reduction of 43.
The “beginning carrying value of the deferred tax liability” furhter reduces income tax expense in 2006.
(NO IDEA WHAT THE ABOVE STATEMENT MEANS)
The reduction in income tax expense attributable to tax rate change si (5% x 1714) = 85
S0 43 + 85 = 128.
I desparately need help in understanding this.
DTA as I understand is nothing but future tax payments asrising due to time diffrences and accounting methods.
But how is DTA carried forward ? Any help will be deeply appreciated.
Thanks in Advance !