DTA/DTL

[ditchdigger2CFA]

Indata Company sold a specially manufactured item for $5,000,000 on December 31, 2006. The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of 6 percent. Indata�s tax rate is 40 percent and its costs to construct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date the sale is made for accounting purposes, but not until cash is received for tax purposes.

On its balance sheet dated December 31, 2006, Indata will, as a result of the transaction described above, increase its deferred tax:

A) liability by $200,000.

B) asset by $800,000.

C) asset by $200,000.

D) liability by $800,000

 

[ov25]

D... increase the liability by 800k...

2.5m*.4=1m. tax on entire transaction. -- Book
tax during y1=500k*.4=200k -- Tax book

Add DTL for remaining 800K

 

[ditchdigger2CFA]

An analyst gathered the following information about a company:

Pretax income of $10,000
Taxes payable of $2,500
Deferred taxes of $500
Tax expense of $3,000
What is the firm's reported effective tax rate?


A) 5%.

B) 30%.

C) 25%.

D) 35%.

One formula in the books says Taxes Payable/Pretax Income

 

[map1]

1 - (Pretax income-tax expense)/pretax income=30%?

 

[ditchdigger2CFA]

You're right map. Oh the contradicting formulas, this is #2 I have come across. In Schweser book 3 on page 212 a formula exists;

tax payable/pretax income

tax expense/pretax income is on the same page. So for a question like this, it gets confusing real fast.

 

[map1]

All items on the tax report relate to the statutory tax. All those on the income statement relate to the effective tax rate.

Pretax income - IS item
Tax expense - IS item
NI - IS item

On the tax report you would have:
Taxable income
taxes payable
deferred taxes as adjustment to the taxes payable in the calculus of the tax expense

The first formula (taxes payable/pretax income) would be correct if you would not have deferred taxes - in this case, taxes payable would be equal to the tax expense.

 

[ov25]

I think D... as 500 would make it 5%. Now we can see 30% it paid... therefore if not for DTL, would have paid 35%.