Income Tax Expense (2 formulas)

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Gekko11

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What formula would you use to solve this?
Income Tax Expense = Taxes Payable − Deferred Tax Asset + Deferred Tax Liability
Income tax expense = PreTax Income*Tax Rate

An analyst has gathered the following tax information:
Year 1 Year 2
Pretax Income $60,000 $60,000
Taxable Income $50,000 $65,000
The current tax rate is 40%. Assume the tax rate is reduced to 30% and the change is enacted at the beginning of Year 2.
Total income tax expense for Year 1 is:
A) $17,000.

B) $23,000.

C) $24,000.
 
I believe that the first equation is the right one, your income tax expense is always equal to current tax payable plus DTL - DTA. Anyone correct me if I am wrong.
 
I think both are right. They are just showing different relationships.
You can re-write this to highlight the relationships
Income tax Expense = Taxable payable - DTA + DTL
Income tax Expense = Pretax Income * tax rate
Tax payable = Taxable Income * tax rate
Pretax Inc * tax rte = (Taxable Income * tax rte) - DTA + DTL
For the above question you have for year one:
60,000 * 0.4 = (50,000 * 0.4) - DTA + DTL
24,000 = 20,000 - DTA + DTL
Income tax expense for year 1 = 24,000.
Tax Payable = 20,000
Note that for the equation to remain balanced, deffered tax liability in year one will have to be 4,000 and deffered tax asset will have to be 0
 
the answer for the above question is B) 23,000 and they used the formula with DTA/DTL in it
 
Shall the fomula be :
Income Tax Expense = Taxes Payable − Changes in Deferred Tax Asset + changes in Deferred Tax Liability ?
 
oh shoot! An example like this is in the CFA text, page 501.
The new tax rate introuduced should reduce the income tax expense by
(40% - 30%) * (60,000 - 50,000) = 1,000.
So the new income tax expense will be 23,000 due to the new tax rate introduced.
Thanks. If a question like this comes up, now i know what to do. goodluck.
 
Hi, bloodline :
Can you confirm if the 60,000 and 50,000 in your calculation are the pretax income and taxable income of year 1 ? And please explain the logic in your calculation.
Thanks in advance !
 
the ques asks for income tax expense in year one.. the answer should be 24000 which is 40% x 60000 „ then how come the answer is 23000 ??
please can any 1 give the calculation as to how the ans is 23000?
 
This is interesting. We know Income tax expense initially equals $24,000 (60,000*0.4) and tax payable = $20,000 (50,000*0.4). This leaves us with a $4,000 (24,000-20,000) DTL. The change in the tax rate will reduce this DTL to $3,000 (4,000 - (0.4-0.3)*4,000). The question/answer is implying that the reduction in DTL should reduce the total tax expense in year 1.
Can anyone explain how this works. I read the bit on pg 501 about it but that was dealing with changes to the income expense in the year of the tax change, not the previous year (tax has always been my weakest topic).
 
mattmania wrote:
This is interesting. We know Income tax expense initially equals $24,000 (60,000*0.4) and tax payable = $20,000 (50,000*0.4). This leaves us with a $4,000 (24,000-20,000) DTL. The change in the tax rate will reduce this DTL to $3,000 (4,000 - (0.4-0.3)*4,000). The question/answer is implying that the reduction in DTL should reduce the total tax expense in year 1.
Can anyone explain how this works. I read the bit on pg 501 about it but that was dealing with changes to the income expense in the year of the tax change, not the previous year (tax has always been my weakest topic).
Click to expand...
heres how I see it.
deferred taxes are Nothing more than accounting estimates. All a DTL is suggesting is that “the tax authority is wrong, I am going to have to pay more in the future so I might as well have it in my accounts retrospectively” The tax aythority of course doesn’t care about what you do as long as you pay exactly what ou are being asked - the taxes payable.
So there are these two components on tax expense : the one that you will pay no matter what and the one that is based on your own estimate / assumption. Well if the expected tax rate changes u have to adjust your estimates accordingly. U don’t adjust the amount the tax authority has imposed - you can’t even if you wanted to. if under 40 percent u were assuming ‘I am going to have to pay 4000 more in the future’ then it is reasonable to say, if the tax rate is expected to fall ’ well , I actually will have to pay less’.
Again : taxes payable are imposed by the tax authority.if they think u owe them x, you pay x
if you think u should have paid more / less then keep it in your accounts but make sure it is adjusted for whatever tax rate is expected.
Apologies for the dodgy typing, ipad/bed configuration :p
 
The following information is available about a company:
(all figures in $ thousands)
2011
2010
Deferred tax assets
200
160
Deferred tax liabilities
(450)
(360)
Net deferred tax liabilities
(250)
(200)
Earnings before taxes
4,000
3,800
Income taxes at the statutory rate
1,200
1,140
Current income tax expense
1,000
900
The company’s 2011 income tax expense (in thousands) is closest to:
A. $1,000.
B. $1,050.
C. $1,250.
 
vicky_cool400 wrote:
The following information is available about a company:
(all figures in $ thousands)
2011
2010
Deferred tax assets
200
160
Deferred tax liabilities
(450)
(360)
Net deferred tax liabilities
(250)
(200)
Earnings before taxes
4,000
3,800
Income taxes at the statutory rate
1,200
1,140
Current income tax expense
1,000
900
The company’s 2011 income tax expense (in thousands) is closest to:
A. $1,000.
B. $1,050.
C. $1,250.
Click to expand...
What a messed up question !
For starters, the income tax expense is already recorded at ‘1000’.
If I assume that by ‘Current income tax expense’ it was meant ‘Pretax Income’ then the answer would be 1250 since there is a net deferred tax liability of 250.
So what is it?
 
^^
Current Income tax Expense is the same thing as Tax Payables not Pretax Income.
 
Argh, I keep making terminology mistakes today! Taxes payable is indeed what I meant. (That is after all why I added the net deferred liabilities to it).
So current income tax expense is taxes payable :o Good to know that.
 
mattmania wrote:
This is interesting. We know Income tax expense initially equals $24,000 (60,000*0.4) and tax payable = $20,000 (50,000*0.4). This leaves us with a $4,000 (24,000-20,000) DTL. The change in the tax rate will reduce this DTL to $3,000 (4,000 - (0.4-0.3)*4,000). The question/answer is implying that the reduction in DTL should reduce the total tax expense in year 1.
Can anyone explain how this works. I read the bit on pg 501 about it but that was dealing with changes to the income expense in the year of the tax change, not the previous year (tax has always been my weakest topic).
Click to expand...
i’m trying to explain this to myself, I hate the tax peice of accounting.
The amount subject to taxes payable to the government is 50,000. The firm believe their tax liability is based on accounting profit of 60k, this is creating a 4k difference in tax liability. The firm paid 20, recognized 24 in therir financials. The DTL is 4k, carried into the next accounting period.
What I do not understand is, why is the 4k DTL, subject to the changes in the tax rate, expensed in the prior period when the books are already closed? Wouldn’t the 1k chnage in DTL show up in year 2’s tax expense? This is how I understood it:
Year 1 tax expense = (50k * .4) - 0DTA + 4kDTL = 24,000
Year 2 tax expense = ($65k * .3) - (5,000 *.3) +( (10,000 * .4) - (10,000*.3) = $19,000
am I wrong?
 
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