taxes

[mrb102189]

Very confused as to how to solve the below:
A company reports DTA of $300 million and DTL of $200 million on its balance sheet for the year ended December 2009. Tax rates from 2010 onward are brought down from 40% to 30%. In response to this change in tax rates, the decrease in the company’s shareholders’ equity is closest to:

1. $25 million.
2. $10 million.
3. $75 million.

Answer: A
The company’s DTA and DTL will fall by 25% as a result of the decrease in tax rates. On a net basis, its net assets and shareholders’ equity will fall by (300 million − 200 million) × 25% = $25m.

 

[S2000magician]

The temporary difference that gave rise to the DTL was:
$200 million ÷ 40% = $500 million.
The revised amount of the DTL will be:
$500 million × 30% = $150 million.
This will result in an increase in equity of:
$200 million − $150 million = $50 million.
The temporary difference that gave rise to the DTA was:
$300 million ÷ 40% = $750 million.
The revised amount of the DTA will be:
$750 million × 30% = $225 million.
This will result in a decrease in equity of:
$300 million − $225 million = $75 million.
The net effect on equity will be:
$50 million − $75 million = −$25 million.

 

[olajideanuoluwa001]

Well explained S2000magician

 

[Gigaloo]

Yeah, thanks S2000magician.

 

[S2000magician]

My pleasure.