Taxes AGAIN

Corp taxes increase from 35% to 50% in 2005. 2005 taxable income = $5000 Deferred tax asset year end 2004 = $2000 Deferred tax liability year end 2004 = $1000 2005 temp diff creating DTL = $600 2005 temp diff creating DTA = $200 What’s the tax expense for 05? 2272 2500 2700 3128 Any ideas? I’m just getting stuck on one part but let’s see the explanations.

End 2004 Net DTA = 2000 - 1000 = 1000 Net Temp Diff DTL in 2005 = 600 - 200 = 400 Taxable Income for 2005 = 5000 Components of Tax expense for 2005 1. Due to Taxable Income = 5000 * .5 = 2500 2. Due to net Temp Diff DTL in 2005 = 400 * .5 = 200 3. Change due to Net DTA change = -1000 / .35 * .5 = -1428 Net Taxable expense = 2500 + 200 - (-1428) = 4128 which does not seem to be any one of the choices. CP

tax expense = 5000*0.5 +(600-200)*0.5-(2000-2000*0.5/0.35)+(1000-1000*0.5/0.35) = 3128

cpk123 Wrote: ------------------------------------------------------- > End 2004 Net DTA = 2000 - 1000 = 1000 > Net Temp Diff DTL in 2005 = 600 - 200 = 400 > > Taxable Income for 2005 = 5000 > Components of Tax expense for 2005 > 1. Due to Taxable Income = 5000 * .5 = 2500 > 2. Due to net Temp Diff DTL in 2005 = 400 * .5 = > 200 > 3. Change due to Net DTA change = -1000 / .35 * .5 > = -1428 > > Net Taxable expense = 2500 + 200 - (-1428) = 4128 > > which does not seem to be any one of the choices. > > > CP CPK - 1428 is not the net change, net change will be 1000-1428=-428

Looks like its A The net effect of the historical DTA/DTL is -428 and the effect of 2005 DTA/DTL is 200 2500-428+200 = 2272

my bad… 2272 should be correct (net increase in DTA should decrease tax expense) Increase in DTA —> advantage, lower taxes Increase in DTL----->disadvantage, higher taxes

Oh man this is a pretty cool question…no detailed calcs are required !! The firm has more DTA than DTL…therefore the tax rate increasing will in fact reduce IT expense, a quick glance at the 2005 DTA/DTLs shows that they aren’t large enough to offset this. A is the only answer which is less than 2500

can someone explain Net DTA?

A

What’s the answer?

Why you multiply the diffrence between DTA and DTL in 2005 by 50%. 600-200=400 which is the amount after tax. Why you multiply it by 50%(Tax) again? Thanks

Because we’re given the difference between pretax income and taxable income that will create DTA/DTL…not the actual 2005 DTA/DTL amounts themselves…to do that you multiply them by the tax rate 50%

that makes sense, becuase I did not see in the question pretax. Do we usually have to assume that, or they usually say pretax amount? Thanks

I’m so lost with this question lol Taxable income (5000) X Current year tax rate(.35) = Taxes payable (1750) +/- Permanent Differences +/- Timing Differences X future tax rate (.50) + Change in DTL - Net Change in DTA _________________________________________________________ Pre-tax Income X Effective rate = Income Tax Expense Can someone please fill in that chart? Thank you!