CFA Practice Question
In a given period for a firm, the deferred tax assets increased by 100 and deferred tax liabilities increased by 350. The pretax income of the firm was 5,000 and the taxable income was 4,450. The firm's tax rate is closest to ______.
A. 40%
B. 45%
C. 35%
Explanation: Pretax income = taxable income + (increase in deferred tax liabilities)/tax rate - (increase in deferred tax assets)/tax rate. This implies (5,000-4,450) = (350-100)/tax rate. Therefore, tax rate = 250/550 = 45.45%.
User Contributed Comments 9
| User | Comment |
|---|---|
| chenyx | OR income tax in accounting report=income tax in tax report + deferred tax liabilities - deferred tax assets. 5000*(1-t)=4450*(1-t)+350-100 |
| alexix | chenyx, your formula does not yield the answer given. |
| mellyg | the formula should be 5000*t=4450*t+350-100. |
| bkballa | can someone please explain why we add back increase in DTL and subtract increase in DTA? |
| shiva5555 | I hate taxes. |
| dini85 | 5000t-4450t = 350-100 t= 250/550 |
| farhan92 | if only the Schrodinger's cat principle applied with taxes on this exam |
| thebkr7 | @farhan92 bahahhaha |
| pigletin | tax liability means you may have to pay more tax in future while tax asset means you may save some tax in future. You can use tax asset to offset tax liability. So you minus assets from liabilities this gives you the amount of tax you may still have to pay in future. This amount is an after tax item so you divide it by the tax rate which gives you the before tax amount to match the difference between reported income and taxable income |