Question

Explain the effect of various tax rates and tax rate changes on deferred income taxes.

Answer 1

A deferred tax liability is created when taxable incme is less than book income that is less tax is paid today but that tax will have to be paid in future.thus,deferredtaxx liability represents additional income tax payable that will be due in future years.

on the other hand ,a deferred tax asset is created when taxable income is more than book income that is more tax is paid today but company will have tax savings in future.thus ,deferred tax assetrepresents tax saving by the company at some point in future.

change in the income tax reates has direct imoact on the valuation of the deferred tax assets and liabilities .in oreder to value deferred tax assets and liabilities properly,a firm must measure them using statutory income tax rate expected to prevail at the future reversal date.thus,firms must adjust the balance of the deferred tax accounts for every change in the tax rate.the adjustmnet will be considered as a change in estimate accounted for on prospective basis so that it does not effect prior year financials. However, the said adjustment will effect income tax expense and effective tax rate for the current year.