Yet another tax Q

Amber Inc uses liab method for DTA and liab computations. Taxable Inc: $22.5M Pre-tax INc: $25 Current Tax rate is 40% when reversal occurs tax rate will fall to 35% What’s the DTA or DTL? DTL $0.875 M DTA $0.875 M DTL $1M DTA $1M There is just one part of the Q i just don’t get. So since taxable < pretax it’s a DTL fine. and the timing difference is $2.5M but why do you use the 35% rate as apposed to 40%?

Because when you actually pay tax, the tax rate will be 35% not 40%. This is different with DTA since you pay tax now and use the DTA to save off tax later.

DTL $0.875 M

So DTL is always calculated using future tax rate and DTA using current?

this is prolly the slow way, not so sweet for the exam, but i think of it as DTL @ 40% tax - then when tax rate changes, the DTL changes in % terms accordingly (ie. -.05/.4), so you change the DTL. i just always think of what is actually happening to the company and work from there - which is going to kill me on the test.