USA DTA effect after change in tax rate


Joined
Nov 9, 2016
Messages
3
Reaction score
2
Country
United States
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!
 
Ad

Advertisements


Ask a Question

Want to reply to this thread or ask your own question?

You'll need to choose a username for the site, which only take a couple of moments. After that, you can post your question and our members will help you out.

Ask a Question

Top