Question

Due to a decrease in the enacted tax rate effective for the following year, a company...

Due to a decrease in the enacted tax rate effective for the following year, a company with a net deferred tax asset balance will recognize
Select one:
a. A decrease in income tax expense in the current year.
b. An increase in income tax expense in the current year.
c. No change to income tax expense in the current year.
d. A decrease in income tax expense in the following year.
e. An increase in income tax expense in the following year.

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Answer #1

Due to a decrease in the enacted tax rate effective for the following year, a company with a net deferred tax asset balance will recognize an increase in income tax expense in the current year. Hence, Option b is correct.

This is because, due to reduction in tax rate of following year the company's current year balance of net deferred tax asset will get reduced. [As DTA = (Accounting base - Tax base) * Tax rate of following year]. Hence, to reduce DTA, company need to recognise as income tax expense in current year. Hence, Option b is correct.

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