Hi guys,
Please help me with this question from CFA website
The following information is available about a company:
| ($ thousands) |
2013 |
2012 |
| 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 |
| Income tax payable (Current income tax expense) |
1,000 |
900 |
The company’s 2013 income tax expense (in thousands) is closest to:
- $1,250.
- $950.
- $1,050.
Solution
C is correct. Income tax expense reported on the income statement = Income tax payable + Net changes in the deferred tax assets and deferred tax liabilities. The change in the net deferred tax liability is a $50 increase (indicating that the income tax expense is $50 in excess of the income tax payable, or current income tax expense) and represents an increase in the expense. Therefore, the income tax expense = $1,000 + $50 = $1,050.
- *My opinion, If I take Tax payable+ Δ DTL- Δ DTA=1000+(-450+360)-(200-160)=870
The problem is that they have negative signs on the Deferred Tax Liabilities; they should be positive.
Still cant get it 
. Would u please explain to me?
An account such as Deferred Tax Liabilities should have a positive (credit) balance. For some reason they’re showing Deferred Tax Liabilities as negative numbers.
If they show them properly (as a positive numbers), then ∆DTL = 450 − 360 = 90, and,
Income\ Tax\ Expense = 1,000 + \left(450 - 360\right) - \left(200 - 160\right) = 1,000 + 90 - 40 = 1,050
1 Like
Got it @S2000magician. Many thanks.
income tax expense = income tax payable +increase in DTL -Increase in DTA
increase in DTA =40
increase in DTL =90
Net effect is Increase in Liabilities = 40-90=-(50)
Add is this 50 to the Net Taxes Payable i.e $1000 +50 and the correct answer is 1050
1 Like
If i apply this to below example, i will choose answer C, but the answer is A
The following information is available for a company that prepares its financial statements according to US GAAP:
|
2015 |
2014 |
| Deferred tax assets |
$1,000,000 |
$800,000 |
| Deferred tax liabilities |
$600,000 |
$700,000 |
| Valuation allowance |
$500,000 |
$400,000 |
The overall effect on 2015 net income from the above changes in the company’s deferred tax accounts is closest to a:
- $200,000 increase.
- $300,000 increase.
- $200,000 decrease.
\Delta = +\Delta DTL - \Delta DTA
= \left(\$600,000 - \$700,000\right) - \left[\$1,000,000 - \$800,000 - \left(\$500,000 - \$400,000\right)\right]
= -\$100,000 - \left(\$200,000 - \$100,000\right)
= -\$100,000 - $200,000 + \$100,000 = -\$200,000
How do they attempt to justify that A is correct?
This is the answer from CFA website
My error: I misread the question. They’re not asking the effect on tax expense; they’re asking the effect on net income.
Note to self: read the <blessed> question.
1 Like
yah, i got it. Many thanks. Lesson 
So normally, both DTL and DTA have positive balance?
