If taxes are changed from 35% in 2004 to 50% in 2005. Compute Tax Expense. If 2005 Taxable Income = 5000 DTA 2004= 2000 DTL 2004 = 1000 2005 temporary differences creating DTA= 600 2005 temporary differences creating DTL= 200 Dont get it… Help Please
Tax on 5000 Taxable income = 5000*.5=2500 Net DTA level as at 2004 = 1000 (This had been calculated at 35% tax). So now you need to re-evaluate this at 50% tax so tax adjustment = 1000 - 1000 / 0.35 * .5 = -428.57 Temporary Difference (total) in 2005 = 400 (which is a DTA) Tax on DTA = 400 * .5 = 200 So total tax = Tax Expense - Change in DTA +Change in DTL= 2500 - (-428.57) - 200 = 2728.57 Since the total tax was calculated based on a DTA - DTL change = 0. (I am not completely sure if I remember all this correctly, so pardon me if I am wrong).
Thank You thats the right answer now I see it better… why did you subtract 1000 from the DTL - DTA in year 2004… 1000- 1000/.35 *.5
the answer should be 1871. tax expense = taxes payable + change in DTL - change in DTA taxes payable = .5*5000 = 2500 change in DTL = (50-35)/35 [this is how much our tax rate has changed] * 1000 = 429 then we add the tax of the current differences creating a DTL (200 * .5 = 100) = 529. change in DTA = (50-35)/35 * 2000 = 858 then we add the tax of the current differences creating a DTA ( 600 * .5 = 300) = 1158. so our tax expense = 2500 + 529 - 1158 = 1871. the 428.57 in the above answer should be subtracted, not added. DTAs and DTLs always move in the same direction as the tax rate change.