Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

1) A firm\'s ending DTA is $20,000. Management is more than 50% sure that future

ID: 2522956 • Letter: 1

Question

1) A firm's ending DTA is $20,000. Management is more than 50% sure that future taxable income will be at least $60,000, but is quite uncertain about amounts greater than $60,000. The future tax rate is 25%. There is no other source of support for the DTA. Determine the firm's net DTA (DTA less VA, if needed).

a. 5,000

b. 15,000

c. 10,000

d. 20,000

e. 0

2) After recording all JEs and closing the accounts, a firm ended 20x4 with $60,000 of remaining NOL CF (a post-new tax law CF) but no other future differences. With a tax rate of 25%, that means the firm ended 20x4 with a $15,000 DTA. Then, for 20x5, taxable income is $40,000. Determine 20x5 income tax expense.

a. 10,000

b. 8,000

c. 12,000

d. 6,000

e. 6,500

a. 5,000

b. 15,000

c. 10,000

d. 20,000

e. 0

Explanation / Answer

1) Current DTA with the company = 20000

Management expecting taxable income = 60000

Tax Rate = 25%

Maximum DTA that can be carried in the books will be = 60000*25% =15000/-

Therefore answer is Option B = 15000.

2) DTA = 60000*25% =15000

2005 Taxable income =40000

so tax for the current year would be = 40000*25% = 10000 ( it would be settled against the previous DTA)