See question below. Answer is what motivated my question.
Selected financial statements:
Accum Depn 4m
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
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?