tricky tax question

CFA Level I
#1

carnation corporation had a deferred tax liability of 30K on Jan 1, 2002 that is expected to reverse in 2004. In 2002, carnation generated pretax financial income of $300k and taxable income of 150K due to a difference in depreciation. the tax rate for 2002 is 30% but congress enacted a reduction in tax rates effective Jan 1 2003 to 25%, carnation’s income tax expense for 2002 is closest to: A 75K B 77500 C 82500 D90000

#2

150*30%=45+150*0.25=82500. C?

#3

Id say B

#4

There are three components of tax expense: of the $300 pretax inc. $150K ($300K minus the depr. difference) is earned and taxed in the current year’s tax return at 30% for $45K ($150 times 30%) half will be taxed in the future when deprec. reverses at 25% for $37.5 ($150 times 25%) and the $30K opening DTL (which is basically 30% of $100K) will now be taxed at 25% of $100K, or the DTL should be $25K, so we catch this up with an adjustment of ($5K). You can also calc this as $30K times 25%/30%, yhe ratio of the change in rates. Add those three figures up for answer B $77.5K

#5

D Income tax expense is on the financial reporting side. $300k * 0.30

#6

super I, good job

#7

didn’t see the beginning DTL. ye, B 30-(30/0.3)*0.25+150*0.3+150*0.25

#8

D? 150*.3+ 150*.3

#9

If the tax rate will be changed in 2003, why do we need to adjust it in 2002?

#10