# Tax time - goodluck

Balance sheet shows DTL of 16000, DTA of 4000 at 31’s dec 07 based on tax rate of 40%. For the current year accelerated depreciation used on the tax return is 20000 more than use for GAAP Reporting. Warranty expense on the income statement is 5000 more than IRS reporting. During the current year firm’s tax rate decreased from 40 to 30%. Pick the best that describe the situation for this year for this firm. Net Deferred Tax Expense adjustment, ROE a) +1200, lower b) -1200, higher c) +3000, lower d) -3000, higher

Since tax rate decreased from 40 to 30% we need to adjust DTL/DTA DTL:16000/0.4*0.3= 12000 DTA:4000/0.4*0.3=3000 adjustment due to the tax change: liabilities -4000, assets -1000, net +3000 ROE is lower because some of the deferred tax liabilities have been converted into equity C) +3000, lower for some reason i either did the question wrong or the new DTL doesn’t fit into the picture?? but here it goes: taxable income \$15,000 lower than GAAP -> will create DTL 15,000*0.3 = 4500 = addition DTL please post solution because i am confused

there is no solution, you are probably right. i made up the question. lol.

doh how did you arrive at the numbers for the answers?

I’d say the answer is D. net effect of this would be reduce your tax expense by 3k, raising your net income, lowering your ROE. There is no choice that says, -3000, higher. LOL hahah, also assume the question is asking the net effect of past restatement. not this year, this year’s information is supposed to confuse you

"Pick the best that describe the situation for this year for this firm. " Doesn’t “this year” imply accounting for the new adjustments?

D for me. DTL is 4000 lower i.e. 16000- (30/40*16000) DTA is 1000 lower i.e. 4000- (30/40*4000) Net tax adjustment to the figures for last yr is 4000-1000=3000 since tax rate is down we reduce the deffered tax charge by -3000 I have ignored the current yr figures because the are charge not an adjustment i think the question is looking for an adjustment based on the tax change since the tax charge for the current yr is lower i.e. net profits should be higher leading to a higher ROE

You got this off schweser pepp, but this question you have to look at it first in order to work it out properly. (Also, schweser made some assumptions as to the numbers, JUST REMEMBER FOR THIS THAT TAXES PAYABLE WAS EQUAL TO 19,500) Depreciation is \$20,000 higher on tax return, .3 X 20,000= 6000 DTL warranty expense is \$5000 higher on IS= .3 X 5000= 1500 DTA this gives us an income tax expense of: income tax expense= taxes payable + change in DTL- change in DTA income tax expense= 19500 + 6000 - 1500 income tax expense= 24000 Now for the existing DTL you must adjust: .3/.4 X 16000= 12000 now for the existing DTA you must adjust: .3/.4 X 4000= 3000 change in DTL-change in DTA= -4000 - (-1000)= -3000 income tax expense= 24000(from above) -3000 income tax expense= 21000