Question

The 2016 Form 10-K of Dow Chemical disclosed the following: Deferred tax assets increased by $939 million and deferred tax liabilities increased by $336 million. How do these balance-sheet changes affect tax expense on the income statement for the year?
Increase tax expense by $1,275 million
Decrease tax expense by $1,275 million
Increase tax expense by $603 million
Decrease tax expense by $603 million
None of the above

Answer 1

Answer:

Decrease tax expense by $1,275 million

Explanation:

Changes in deferred tax asset account inversely affects tax expense. Changes in the deferred tax liability account, directly affects tax expense.

The increase in deferred tax assets and decrease in deferred tax liabilities both decrease tax expense for the year

= $939 + $336 million

= $1275 million

Therefore, These balance-sheet changes will affect tax expense on the income statement for the year by Decreasing the tax expense by $1,275 million.