FRA

pooja923
Good Student
Posts: 25
Joined: Fri Mar 11, 2016 11:38 am

FRA

Postby pooja923 » Sun May 08, 2016 4:33 pm

An analyst gathered the following information about a company:
• Taxable income = $100,000.
• Pre tax income = $120,000.
• Current tax rate = 20%.
• Tax rate when the reversal occurs will be 10%.
What is the company's tax expense?
1. $22,000.
2. $24,000.
3. $10,000.

Explanation
Deferred tax liability = (120,000 − 100,000) × 0.1 = 2,000
Tax expense = current tax rate × taxable income + deferred tax liability
0.2 × 100,000 + 2,000 = 22,000
Kindly explain what is meant by “Tax rate when the reversal occurs will be 10%.”
Why is the answer option 2 not correct?

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edupristine
Finance Junkie
Posts: 722
Joined: Wed Apr 09, 2014 6:28 am

Re: FRA

Postby edupristine » Mon May 09, 2016 5:32 am

Hi Pooja

In this Question you have given pretax income and taxable income, from this you can find out
Deferred Tax Liability= Pretax Income- Taxable Income, which is $20,000.

Now you have to find out Income Tax Expense= 20% Taxable Income+10% Deferred Tax Liability
=0.2*100,000+0.1*20,000
=20,000+2000
=$22,000
(The tax rate when the reversal is occur is applicable on Deferred Tax Liability and current tax rate is applicable on taxable income.)

pooja923
Good Student
Posts: 25
Joined: Fri Mar 11, 2016 11:38 am

Re: FRA

Postby pooja923 » Thu May 12, 2016 5:35 am

THANKS A LOT


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