CFA Practice Question

There are 520 practice questions for this study session.

CFA Practice Question

If a firm has been experiencing rapid growth with higher property, plant, and equipment expenditures, which of the following would probably occur?
A. The deferred tax liability would increase over time.
B. The deferred tax asset would increase over time.
C. The deferred tax liability would decrease over time.
Explanation: The higher expenditures on fixed assets would result in higher amounts being put into the deferred tax liability account than would be reversing out. Thus, the account would continue to increase and would not reverse.

User Contributed Comments 5

User Comment
schweitzdm Can someone explain how higher expenditure in fixed assets results in a higher DTL?
janis36 I don't understand the logic either. Can someone please explain?
birdperson accelerated depreciation for tax?
rjdelong Investing in fixed assets causes depreciation in the future. Companies will capitalize the purchase (make it an asset that needs to be depreciated not an expense). The depreciation is usually in an accelerated way on tax return (to pay lower taxes to IRS), but not on the financial statement (lower costs raise net income on books to show investors). This means they pay lower taxes now, but will and pay more in future, a DTL (as the straight line method they use on fin reports catches up with the double declining method they use for IRS). However, as the company grows and continues to buy more and bigger PPE the new PPE 1st year depreciation essentially trumps the catchup of past PPE and net DTL still goes up.
titi82000 Thanks rjdelong for the explanation!
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