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Basic Question 3 of 3
Assuming a firm has a deferred tax liability, how does it report increases in future tax rates, according to GAAP?
B. A debit adjustment to retained earnings in the year the tax rate change is passed.
C. A debit adjustment to income tax expense in the year when the tax rate change is effective.
A. A debit adjustment to income tax expense in the year the tax rate change is passed.
B. A debit adjustment to retained earnings in the year the tax rate change is passed.
C. A debit adjustment to income tax expense in the year when the tax rate change is effective.
User Contributed Comments 9
| User | Comment |
|---|---|
| kalps | Umm, so I am assuming the change is made in the year in which the tax rate change is passed (not effective) |
| mtcfa | Can anyone explain exactly how to react regarding changes in tax rates? |
| o123 | Rate increase: DTA: Increase (=DTA*%age increase) DTL: Increase (=DTL*%age increase) Interest Expense = taxes payable + kDTL - kDTA (k=change) my question is: If were assuming DTL, then the net effect of the equation above is to incrase DTL. This would lead to an increase in Interest Expense, so wouldint you credit that account instead of debit it? |
| quynhnk79 | Debit for the cost account indicate an increase in that account |
| uberstyle | an increase to expense is a reduction to shareholder equity, so thus a debit |
| boddunah | tax payable is calculated at current tax rate but DTL and DTA are adjusted to reflect new tax rates in the year in which new tax laws are enacted. does not matter when new tax laws are effective. Income tax expense shows that effect. |
| johntan1979 | I wonder if the debit is pro-rated if the tax rate change is passed in the middle of the year? Debit amount x 6/12 |
| farhan92 | C seems to make more sense to me. But me and US GAAP seem to not get on too well... |
| kingirm | C looks more plausible |
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Learning Outcome Statements
analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a company's financial statements and financial ratios
CFA® 2024 Level I Curriculum, Volume 3, Module 9.