Hi there, I have a concern about the following question. My question how does one know to use the formula for Tax expense in this case which is Tax Expense = Taxes Payable + DTL - DTA. What I inititial thought was just to take Pretax Income and multiply it by Tax Rate which turns out to be 24k. Which is wrong! Thanks.
An analyst gathered the following information about a company:
- Taxable income = $100,000.
- Pretax income = $120,000.
- Current tax rate = 20%.
- Tax rate when the reversal occurs will be 10%.
What is the company’s tax expense?
A) $24,000. B) $10,000. C) $22,000. Answer C
Deferred tax liability = (120,000 − 100,000) × 0.1 = 2,000
Tax expense = current tax rate × taxable income + deferred tax liability
0.2 × 100,000 + 2,000 = 22,000