See question below. Answer is what motivated my question.
Selected financial statements:
ppe 10m
Accum Depn 4m
DTL 0.6m
Tax rate 40%
The balances were all associated with a single asset. The asset was permanently impaired and has a present value of future cash flows of $4 million. After asset is writte down, how were the tax accounts affected:
a) DTL eliminated, DTA increased $200k
b) tax payable decreases $800k
dtl eliminated, DTA increase to $1.4m
ANSWER:
Asset value on balance sheet = $10 - 4m (accum depn) = $6m.
Written down to $4m therefore write down = $2m
$2m x 40% = $800k deferred tax impact.
Therefore DTL eliminated and DTA established at $200k (i.e. netted off the existing DTL of $0.6m and added DTA of $0.2m).
I thought the reversals were underlying asset specific? I guess the assumption we are making above is that there is only one asset…therefore evertyhing is related to that one asset which is written down. Perhaps that is the answer?
Thanks