Tax Base

CFA Level I
#1

Doesn’t the difference between the tax base and the carrying value that gives rise to a DTL of $60,000 be offset by the tax loss carryforward which gives rise to a DTA of $60,000? Therefore the total liabilities-to-equity ratio remain unchanged?

Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of $600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be utilized in the foreseeable future. Deferred tax items on the balance sheet are valued based on a tax rate of 30%. If the tax rate is expected to increase to 35%, the adjustments to the value of deferred tax items will most likely cause Habel’s total liabilities-to-equity ratio to:

A) increase.

B) decrease.

C) remain unchanged.

#2

What’s the answer? I would have gone ‘B’ using the simplistic argument:

Tax asset increases in value from 60,000 (200,000 * 0.3) to 70,000 (200,000 * 0.35) and is added as an asset in the BS. Double entry accounting means that the asset is also added into equity, and hence liability/equity must decrease.