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The 2013 annual report of Dow Chemical disclosed the following: Deferred tax assets decreased by $1,503 million and deferred tax liabilities increased by $38 million. How do these balance-sheet changes affect tax expense on the income statement for the year?A) Increase tax expense by $1,331 millionB) Decrease tax expense by $1,331 millionC) Increase tax expense by $1,541 millionD) Decrease tax expense by $1,541 millionE) None of the above

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Answer:

The correct option is (c) Increase tax expense by $1,541 million

Explanation:

Step 1. Given information.

  • Decrease in Deferred Tax Asset 1503 Million
  • Increase in Deferred Tax Liabilities 38 Million

Step 2. Formulas needed to solve the exercise.

Increase in Tax Expense= Decrease in Deferred Tax Asset + Increase in Deferred Tax Liabilities  

Step 3. Calculation.

Increase in Tax Expense = 1503+38 =  1541 Million  

Step 4. Solution.

The correct option is (c) Increase tax expense by $1,541 million

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