Question

B Co. reported a deferred tax liability of $24 million for the year ended December 31, 2017, related to a temporary difference of $60 million. The tax rate was 40%. The temporary difference is expected to reverse in 2019 at which time the deferred tax liability will become payable. There are no other temporary differences in 2017–2019. Assume a new tax law is enacted in 2018 that causes the tax rate to change from 40% to 30% beginning in 2019. (The rate remains 40% for 2018 taxes.) Taxable income in 2018 is $90 million. Required: Determine the effect of the change and prepare the appropriate journal entry to record B’s income tax expense in 2018.

Answer 1

Answer and Explanation:

Journal Entry would be:

Tax expense (plug)                                                               30

Deferred tax liability [( 30% - 40%) x $ 60]                             6

Taxes payable (40% x $90)                                                               36