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CFA Level I · CFA Level I Exam · Analysis of Income Taxes

A company reports a deferred tax asset of 60 million based on a 30% tax rate. Before year-end, legislation is enacted that lowers the rate to 25% for all future periods. Ignoring any other changes, the remeasured deferred tax asset and the most likely effect on net income are closest to:

The deferred tax asset reflects 200 million of deductible differences. At the new 25% rate it falls to 50 million. The 10 million write-down is booked as deferred tax expense, so net income decreases by 10 million.

  1. Aa deferred tax asset of 50 million and a 10 million decrease in net incomeCorrect
  2. Ba deferred tax asset of 50 million and a 10 million increase in net income
  3. Ca deferred tax asset of 72 million and a 12 million increase in net income

Explanation

The underlying deductible difference is 60/0.30 = 200 million. At 25%, the asset is 50 million. The 10 million write-down is recorded as additional deferred tax expense, reducing net income. The other options reverse the direction or the rate.

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