DTA effect after change in tax rate

USA Discussion in 'Exams and Studying' started by Ducol, Nov 10, 2016.

  1. Ducol

    Ducol

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    Hello!
    I have moved this thread here from the general discussion part.

    I will be grateful for your help on the deferred tax assets and the tax rate change effect.

    The task is to find how, in case of decreased tax rate, the change in deferred tax asset account affects net income, income tax expense, tax payable, cash from operating activities, etc. - which items are decreased. I am trying to understand why, if a tax rate is decreased, the income tax expense goes up.

    Please, take a look at my reasoning and help me to understand my mistake.

    For example:

    Tax rate 35%

    FINANCIAL ACC-G

    Pre tax income 400

    Temporary difference (190)

    Pre tax income 210

    Income tax expense 73,5

    ___________________

    Net Income 136, 5

    TAX ACC-G

    Income 400

    Temporary difference 0

    Taxable income 400

    Tax payable 140

    __________________

    Net Income 260

    Decrease tax rate to 30%

    FINANCIAL ACC-G

    Pre tax income 400

    Temporary difference (190)

    Pre tax income 210

    Income tax expense 63

    ___________________

    Net Income 147

    TAX ACC-G

    Income 400

    Temporary difference 0

    Taxable income 400

    Tax payable 120

    __________________

    Net Income 280

    Thus I see that income tax expense goes down if the tax rate is decreased, as well as tax payable and deferred tax asset.

    Journal entries tax 35%:

    Dr Income tax expense (+E) 73,5

    Dr DTA (+A) 66,5

    Cr Tax Payable 140



    Dr Income tax expense (+E) 63

    Dr DTA (+A) 57

    Cr Tax Payable 120



    The only way income tax expense can increase is when tax payable stays the same as it was at 35% rate.

    On the other hand:
    For example, the balance in DTA was 10K at 35% tax rate. If the tax rate has changed to 30%, then the balance in DTA should be 8571. To get there I have to Credit DTA account (decrease DTA) for 1429. If I credit DTA for 1429, then I have to debit interest tax expense by the same amount and thus increase that expense. Is this correct? If yes, I don’t understand the logic - what happens to the tax payable in this case? Thank you!
    Please, help me to see my mistake.

    Thank you very much!
     
    Ducol, Nov 10, 2016
    #1
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