CFA, CAIA, FRM Exam Discussion at AnalystForum for Chartered Financial Analyst ca...

Page 1 of 3

CFA Home | Forums | Test Prep | Discounts | Samples | Jobs | Links | Win a $250 Gift Card new

Forum Home | General Discussion | CFA Level I | CFA Level II | CFA Level III | Hook Up
Discussion of the Level I CFA® exam.
Goto: Forum List • Message List • New Topic • Search • Log In Goto Thread: Previous • Next

Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: prometheus231 (IP Logged)
Date: May 10, 2008 07:35AM

A new president is elected in November 2004. In early 2005, he enacts his tax proposal that includes an increase in
the corporate tax rate from 35% to 50%. Use the information below to compute the tax expense for 2005.

2005 taxabke income= $5000

Deferred tax asset year end 2004 = $2000
Deferred tax liability year end 2004 =$1000
2005 temporary differences creating deferred tax liabilities= $600
2005 temporary differences creating deferred tax assets = $200

A 2272
B 2500
C 2700
D 3128

I keep gettin 3128 while shweseris saying the answer is 2272

the question is driving me crazy.

Anyways thanks a mil

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: cpk123 (IP Logged)
Date: May 10, 2008 10:29AM

i am getting 1472

Net 2004 DTA = 1000 @ 35%

Net 2005 DTL = 400 @ 50% already

Tax Payable = 5000 @ 50% = 2500

Tax expense = Tax payable + net DTL - net DTA

= 2500 + 400 - 1000 / .35 * .5
= 2900 - 1428
= 1472

Options: Reply To This Message • Quote This Message

http://www.analystforum.com/phorums/read.php?11,701945 12/14/2010
CFA, CAIA, FRM Exam Discussion at AnalystForum for Chartered Financial Analyst ca... Page 2 of 3

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: Dreary (IP Logged)
Date: May 10, 2008 10:41AM

2004 DTL should be adjusted to $1000/0.35 = $1429

2004 DTA should be adjusted to $2000/0.35*0.5 = $2857

2005 tax expense = ($5000 + 600 - 200) * 0.5 + $429 - $857 = $2272

It took me a while to get it!

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: FisherSU (IP Logged)
Date: May 10, 2008 11:07AM

Tax expense = (Taxable Income + DTL - DTA) * (Tax rate) + [(new rate/old rate)*DTL - DTL] - [(new rate/old rate)
*DTA - DTA]

In the above example:

Tax expense = (5,000 + 600 - 200) *0.5 +[(0.5/0.35)*1,000 - 1,000] - [(0.5/0.35)*2,000 - 2,000] = 2,700 + 429 -
857 = 2,272

Hope this helps

Edited 1 time(s). Last edit at Saturday, May 10, 2008 at 11:10AM by FisherSU.

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: thunderanalyst (IP Logged)
Date: May 10, 2008 03:56PM

I am totally confused now,

Income tax expense = taxes payable + Change in DTL- Change in DTA

or DTL = (income tax expense-taxes payable)* tax rate --> so why are you guys multiplying DTL and DTA with tax
rate in the calculations of income tax expense again. Isn't it double taxing ??

Here is what I think,

Change in DTL due to tax change = 1,429-1000=429

Change in DTA due to tax change = 2,857-2000=857

Income tax expense = 2500 + (600-200)+(429-857) = 2,472

Some one please clarify.

Dreary and FISHER, why did you do-- 2500+(600-200)*0.5+(429-857)= 2,272 ??

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: Dreary (IP Logged)
Date: May 10, 2008 04:03PM

Temporary differences are gross by definition.

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

http://www.analystforum.com/phorums/read.php?11,701945 12/14/2010
CFA, CAIA, FRM Exam Discussion at AnalystForum for Chartered Financial Analyst ca... Page 3 of 3

Posted by: thunderanalyst (IP Logged)

Date: May 10, 2008 04:08PM

you mean there is difference when question states,

2005 temporary differences creating deferred tax liabilities =600 VS. deferred tax liability at end of 2005 is $600 ???

Thanks

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: Dreary (IP Logged)
Date: May 10, 2008 04:10PM

Yes. DTA and DTL are after-tax impacts, while temporary differences are before taxes.

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: thunderanalyst (IP Logged)
Date: May 10, 2008 04:13PM

My bad!!. question says Temporary differences CREATING deferred tax liability is...

Thanks man !! :)

Options: Reply To This Message • Quote This Message

Re: Please Help!!!!!!!!!!!!!!!! Going crazy DTL & DTA

Posted by: Dreary (IP Logged)
Date: May 10, 2008 04:16PM

It should say: Temporary differences which will result in recording a deferred tax liability are blah blah.

Options: Reply To This Message • Quote This Message

Goto: Forum List • Message List • Search • Log In

Sorry, only registered users may post in this forum.

Home | Message Board Rules | CFA Exam | CAIA Exam | FRM Exam | Privacy Policy | DMCA Notice | Contact
Us
Copyright © 2010 AnalystForum. All rights reserved.

CFA® and Chartered Financial Analyst are trademarks owned by CFA Institute.
CAIA® and Chartered Alternative Investment Analyst are trademarks owned by Chartered Alternative Investment Analyst Association.
FRM® and Financial Risk Manager are trademarks owned by Global Association of Risk Professionals.

http://www.analystforum.com/phorums/read.php?11,701945 12/14/2010