"Financial Report":deferred tax assets
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Questions 1:
If a company has a deferred tax asset reported on its statement of financial position and the tax authorities reduce the tax rate, which of the following statements is most accurate concerning the effect of the change? The existing deferred tax asset will:
A、 not be affected.
B、 increase in value.
C、 decrease in value.
Questions 2:
An analyst gathers the following information about a company:
If the company had used the first-in, first-out (FIFO) method instead of last-in, first-out (LIFO), its 2014 net income would most likely have been:
A、 $9,000 higher.
B 、$21,000 higher.
C、 $30,000 lower.
C is correct. A decrease in the tax rate will result in a decrease in the previously reported amounts of deferred tax assets. That is, the value of the future tax assets, based on the new lower rate, is reduced for offsetting future tax payments.
A is incorrect. The change would affect not only the current year’s reported income tax expense but also any amounts previously established on the balance sheet.
B is incorrect. The value of the future benefits decreases, not increases.
B is correct
If an increase in the LIFO reserve occurs, LIFO COGS will be higher than FIFO by the amount of the increase. With a lower COGS under FIFO, pretax income will be higher by $30,000. With a lower COGS under FIFO, after-tax income will be higher by $30,000 × (1 – 0.30) = $21,000.
A is incorrect. Tax rate × change in LIFO reserve = 0.30 × ($450,000 – $420,000) = $9,000
C is incorrect. Change in the LIFO reserve = $450,000 – $420,000 = $30,000
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