 # 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