* A firm acquires an asset for $120,0000 with a 4-year useful life and no salvage value. * The asset will generate $50,0000 of cash flow for all 4 years. * The tax is 40% each year. * The firm will depreciate the asset over 3 years on a straight-line (SL) basis for tax purposes and over all 4 years on SL basis for financial reporting purposes. * Suppose tax rates rise during year 2 to 50%. At the end of year 2, the firm’s balance sheet will show a deferred tax liability of: A. $5000 B. $6000 C. $8000 D. $10000
Year1 Tax statement = Taxes Payable = (50 - 40)*0.40 = 4K Financial statement = ITE = (50 - 30)*0.40 = 8K DTL = 4K Year2 Tax statement = Taxes Payable = (50 - 40)*0.50 = 5K Financial statement = ITE = (50 - 30)*0.50 = 10K DTL = 5K recalculating year1 DTL = 4*0.5/0.4 - 4 = 1K Total = 4K + 5K + 1K = 10K = D??
is this a level 2 question? i haven’t seen any dtl questions yet, so it caught me off guard.
San Fran - I have chosen not to see any dtl questions yet, but it comes from FSA synthesis at the end of SS 7.
awesome. i’ve gone through that chapter but hadn’t seen them ask a straight up dtl question yet… will review fsa again in a week or two. the review is neverending.
FSA synth is on my plate for tomorrow. Can’t hardly wait.
and just to bring back some L1 memories Income Tax Expense in Year 2: 10K + 1K (change in DTL) = 11K CP
I have not yet read SS7, but this is what I could recall from L1
That’s for Level I not II. If that’s in the CFAI books for level II, I’m going to call Schweser and command a refund
maagian, that’s what i was getting at, my friend.
looks like a level 1 question to me also