Tax expense formula

CFA Level I
#1

Hi - following situation:

  • Taxable income = 100,000
  • Pretax income = 120,000
  • Current tax rate = 20%
  • Tax rate post reversal = 10%

What is the tax expense?

I thought = 0.2*120,000 + (120,000-100,000)*0.1 = 26,000

Answer seems to be wrong. Anyone idea why?

Thanks

#2

Anyone pls?

#3

It says taxable income is 100,000, not 120,000. So,

0.2 x 100,000 + (120,000 - 100,000) x 0.1 = 22,000

Maybe I’m wrong.

#4

What is post reversal? Is there info missing?

Tax= tax rate * taxable income

#5

Also wanted to ask that, but was too afraid to realize level 1 curriculum has changed that much lol.

#6

since pre-tax income was 120000 and taxable income was 100000 -> you had 20000 of DTA in play.

Now Tax = Tax Rate * Taxable Income = 0.2 * 100000 = 20000

Also once the tax rate reduces to 10% - you get a benefit ? (Delta DTA * New Tax Rate) = -0.1 * 20000 = -2000

So net tax = 18000?

#7

Not sure about the question but I think it’s a DTL not a DTA. If the reported income for tax purposes (taxable income) is lower than the income reported in the financial statements (pretax income), the firm hasn’t paid the taxes on higher income ‘financial’ income yet, so that’s a liability.