Taxes - I probably spent 10 mins on this question, and still got it wrong!!! I’m reading the whole section again tonight!!! DAMN!! A company purchased a new pizza oven directly from Italy for $12,675. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation. Assume the tax rate for years 4 and 5 changed from 41% to 31%. What will be the deferred tax liability as of the end of year 3 and the resulting adjustment to net income in year 3 for financial reporting purposes due to the change in the tax rate? Deferred Tax Liability Net Income A) $1,572 $747 B) $1,572 $507 C) $1,039 $507

is it B? I took 2/5 x 12 675 (net book value of the asset after three years for accounting purposes, zero book value for tax purposes). = 5 070 x 0.31 = 1 571.7 DTL with new tax rate and the net income adjustment is equal to DTL adjustment 5 070 X (0.41 - 0.31) = 507 ok?

Damil, Unlikely such a computational question would show on the exam. Also taxes wont place a massive part in FRA, just an equitable one. Either way, pfcfaataf basically summed it up in a tiny box for you, don’t think I can do a better job then that.

^^ talk about a shortcut - - - Nice im over here adding all SL dep amounts and then subtracting the DB amounts but yeah i got B as well

why did you multiply by 2/5? What is the long way of doing this problem?

DTL comes from difference in depr. for acc and tax purposes. tax net book value is 0 at t+3. acc net book value is purchase price - depr. (which is 3/5, linear depr). so acc - tax net book value = tax depr. - acc. depr -> x tax rate = dtl if possitive value

don’t waste your time this late in the game. understand the core concepts - when/why and how they’re created. know how to calculate the basics of one i.e. when using straight line and accelerated depreciation, but a question like this where there is a change in the tax rate will take more then 1.5 minutes. factor into that, incorrect keys being hit, and these can swell to a lot of stress and screwing about, all to prove what???

anyway, back to the question… what you need to do is get the DTL for the 41% tax rate. then get the DTL for the 31% tax rate. The 31% DTL will give you half the answer above. When you get the difference between the 41% DTL and 31% DTL, that will give you the difference in net income. Increases(decreases) in taxes increase(decrease) DTA’s and DTL’s. but like i said above, don’t get too stressed about this. you’ll get a few no doubt, but most will be about the relationships, not the calculations.

When I tried this question I initially got it wrong because when they say “for tax purposes depreciation is accelerated to 35% in years 1 and 2, and 30% in year 3. For purposes of this exercise ignore all expenses other than depreciation.” I took that to mean the percentage of remaining book value in that year. However, it meant percentage of initial book value… I’m going to assume that if a question similar to this pops up on the actual exam they would be more explicit with the depreciation treatment.

I too, think it’s B. Damil, what’s the correct answer?

Answer is B

I am confused a bit. If the accelerated depreciation is to be used, using 35% in Year1 and 2; and 30% in Year 3, then the Depreciation applied would be 4436.25 in 1 and 2 and 3802.5 in third. pfcfaataf - Why did you take 2/5 (Net Book Value)? The question does not ask to use DDB, but uses a specific depreciation schedule. Please help, as I am confused.

should be according to the schedule, fin reporting uses the straight line. your on the right track