Deferred Tax Effect on Net Income

[archived_user]

Please someone help me with this exercise. My question is written in the end of it.
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:

1. $200,000 increase.
2. $300,000 increase.
3. $200,000 decrease.

Solution
A is correct. A valuation allowance reduces the value of the deferred tax assets under US GAAP, so the total change in net income as a result of the changes in the three accounts can be calculated as follows:
Account
Change in Account from 2014
Effect of Change on Net Income
Direction
Dollar Effect
Deferred tax assets
$ 200,000 increase
Increase
$200,000
Deferred tax liabilities
$100,000 decrease
Increase
100,000
Valuation allowance
$100,000 increase
Decrease
(100,000)
Overall effect:
A net increase of:
$200,000
How come an increase in DTA increase Net Income reported? Isn`t it supposed to be lower since we actually have created an incremental DTA because EBT are actually lower on accrual accounting than Tax accounting?
For example: For Accounting Purposes—-> 12(Revenue) - 2 (Depreciation) =10(EBT)- 1(10%tax)= 9 Net Income
For Tax Purpose—> 12 (Revenue)-1(Depreciation allowed under tax reporting)=11(EBT)-1.1(10% Tax)=9.9 Net Income. (In this case we have a Deferred Tax Asset Created cause we actually paid 1.1 instead of 1 and the Net Income i actually lower 9 instead of 9.9 so why does the exercise says that an increase in DTA increases Net Income?)

 

[archived_user]

In your example the increase in tax liability is Deferred Tax Liability, not DTA. Decreasing depreciation will increase the liability.