I believe that the first equation is the right one, your income tax expense is always equal to current tax payable plus DTL - DTA. Anyone correct me if I am wrong.
Can you confirm if the 60,000 and 50,000 in your calculation are the pretax income and taxable income of year 1 ? And please explain the logic in your calculation.
the ques asks for income tax expense in year one… the answer should be 24000 which is 40% x 60000 , then how come the answer is 23000 ?? please can any 1 give the calculation as to how the ans is 23000?
This is interesting. We know Income tax expense initially equals $24,000 (60,000*0.4) and tax payable = $20,000 (50,000*0.4). This leaves us with a $4,000 (24,000-20,000) DTL. The change in the tax rate will reduce this DTL to $3,000 (4,000 - (0.4-0.3)*4,000). The question/answer is implying that the reduction in DTL should reduce the total tax expense in year 1.
Can anyone explain how this works. I read the bit on pg 501 about it but that was dealing with changes to the income expense in the year of the tax change, not the previous year (tax has always been my weakest topic).
deferred taxes are Nothing more than accounting estimates. All a DTL is suggesting is that “the tax authority is wrong, I am going to have to pay more in the future so I might as well have it in my accounts retrospectively” The tax aythority of course doesn’t care about what you do as long as you pay exactly what ou are being asked - the taxes payable.
So there are these two components on tax expense : the one that you will pay no matter what and the one that is based on your own estimate / assumption. Well if the expected tax rate changes u have to adjust your estimates accordingly. U don’t adjust the amount the tax authority has imposed - you can’t even if you wanted to. if under 40 percent u were assuming ‘I am going to have to pay 4000 more in the future’ then it is reasonable to say, if the tax rate is expected to fall ’ well , I actually will have to pay less’.
Again : taxes payable are imposed by the tax authority.if they think u owe them x, you pay x
if you think u should have paid more / less then keep it in your accounts but make sure it is adjusted for whatever tax rate is expected.
Apologies for the dodgy typing, ipad/bed configuration
The following information is available about a company: (all figures in $ thousands) 2011 2010 Deferred tax assets 200 160 Deferred tax liabilities (450) (360) Net deferred tax liabilities (250) (200) Earnings before taxes 4,000 3,800 Income taxes at the statutory rate 1,200 1,140 Current income tax expense 1,000 900 The company’s 2011 income tax expense (in thousands) is closest to: A. $1,000. B. $1,050. C. $1,250.
For starters, the income tax expense is already recorded at ‘1000’. If I assume that by ‘Current income tax expense’ it was meant ‘Pretax Income’ then the answer would be 1250 since there is a net deferred tax liability of 250.
Argh, I keep making terminology mistakes today! Taxes payable is indeed what I meant. (That is after all why I added the net deferred liabilities to it).
So current income tax expense is taxes payable :o Good to know that.
i’m trying to explain this to myself, I hate the tax peice of accounting.
The amount subject to taxes payable to the government is 50,000. The firm believe their tax liability is based on accounting profit of 60k, this is creating a 4k difference in tax liability. The firm paid 20, recognized 24 in therir financials. The DTL is 4k, carried into the next accounting period.
What I do not understand is, why is the 4k DTL, subject to the changes in the tax rate, expensed in the prior period when the books are already closed? Wouldn’t the 1k chnage in DTL show up in year 2’s tax expense? This is how I understood it: