  # The Jets company recorded a deffered tax liability in the amount of \$18,750 on December 2020 due to the book value of equipment exceeding the tax basis of equipment by \$75,000. The difference will reverse equally over the next three years. In late 2020 the enacted tax rate increased to 42.5% beginning of 2022. Determine the income tax rate that is the enacted rate for 2020. What journal entry should the Jets record to adjust the deferred tax liability, if any?

Question

The Jets company recorded a deffered tax liability in the amount of \$18,750 on December 2020 due to the book value of equipment exceeding the tax basis of equipment by \$75,000. The difference will reverse equally over the next three years. In late 2020 the enacted tax rate increased to 42.5% beginning of 2022. Determine the income tax rate that is the enacted rate for 2020. What journal entry should the Jets record to adjust the deferred tax liability, if any?

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Step 1

The deferred tax liability of \$18,750 has been computed by multiplying the difference of the book value and tax basis of equipment which is \$75,000 and the tax rate of the current year

So, the current year 2020 tax rate = 18750*100/7500=25% .

Step 2

This deferred tax needs to be adjusted in three years. The tax rate has increased from 2022. So, for 2021 the tax rate would be 25% i.e. the deferred tax liability reversed would be \$6250. Now, the remaining 12500 needs to be increased to 42.5%

So, the tax liability due to increase in tax rate to 42.5% would be 12500*42.5/25=21,250

So, the deferred tax liability needs to be increased by 21,250-12,500=\$8,750

Since, the tax rate has been increased; the company would be required to pass the following entry in 2020

 Account Debit \$ Credit Income Tax ...

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