Hello, According to CFAI Text, Income tax expense = Tax Payable + deferred tax According to schwsner Tax expense = Tax payable+change in defeered tax which one is correct ? Here is question, I am not getting correct answer It is from schwsner concept checkers in Income Tax analysis" A firm acquires an asset of $120,000 with 4 yr useful life and no salvage value Asset will generate $50,000 of cash flow for all 4 years Tax rate is 40% each year Firm will deprecite asset over three year on straigh line for tax purpose abd over all four years on straigh line basis for financial reporting purpose. Question 1> Income tax expense in year 4 is a>4,000 b>6000 c>8,000 d>20,000 Income tax expense = Tax payable+ deferred tax =20,000+(0-12,000) no DTL and DTA = 12000 =8,000 I got this right 2>Suppose tax rate rises during year 2 to 50%, what will income tax expense in year 2? a>5,000 b>8,000 c>10,000 d>11.000 Tax expense = tax payable+deferred tax =10,000*.50+20,000*.50 ( DTL = 20,000*.50, dta=0) =15,000 but answer given is 11,000 Can anyone explain it ? explanation given is change in deffered tax ( dta = 20,000*.50-10,000*.40=6,000) Since tax has increased , wouldn’t you apply new tax rate of 50% to existing dereed liability of 20,000 giving 20,000*.50=10,000 as dta Your help would be appericiated. -Thanks
A complete definition is in fact: Income tax expense = Tax payable + Change in Deferred Tax Liabilities - Net Change in Deferred Tax Assets A few days back we have discussed over the DTA, DTL and the difference between income tax expense and taxes payable, here is the link to the thread: http://www.analystforum.com/phorums/read.php?11,668059
Year 1 Tax Depreciation: 120/3 = 40 FSA Depreciation: 120/4 = 30 So DTL: (40-30) * .4 = 4 Year 2: Tax Depreciation: 120/3 = 40 FSA Depr= 120/3 = 30 DTL in Year 2: (40-30) * .5 = 5 Change in DTL due to Year 1: 4 / .4 * .5 - 4 = 5 - 4 = 1 Tax Expense in Year 2: Tax Payable: (50-40) * .5 = 5 Tax Expense = 5 + 5 + 1 = 11 Hope this helps. CP