CFA Practice Question

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CFA Practice Question

Assuming a firm has a deferred tax liability, how does it report increases in future tax rates, according to GAAP?

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.
Correct Answer: A

Income tax expense is adjusted for an increase in the deferred tax liability due to the change in future tax rates. The adjustment is an increase (a debit adjustment) to income tax expense in the year of the change.

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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