Book 3 - Reading #38 in Schweser - pg 221 #10. Suppose tax rates rise during year 2 to 50%. What will be the income tax expense in year 2? The answer is: taxes payable + increase in deferred taxes = tax expense $5000 + ($10,000 - $4000) = $11,000 How did they get ($10,000 - $4000)? Also, what’s the logic behind this?
DTL at the end of the first year = 4K at 40% Now at 50% --> existing DTL (4K needs to be revisited) so becomes 4/ .4 * .5 = 5K Change in DTL because of the Tax rate change = 5K - 4K = 1K In the 2nd year --> Taxable Income = 10K Taxes = 10K * .5 = 5K DTL for the 2nd year ==> 10K * .5 = 5K So total Tax Expense for year 2: = 5K (Taxes) + 5K (New DTL) + 1K (Change in old DTL from year 1) = 11K CP
I get it now… thanks CP : )