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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Cole Company had a deferred tax liability of $1,000 at the end of Year 1 when the tax rate was 20%. In Year 2, Congress increases the income tax rate from 20% to 30%. Record the journal entry Cole would make to adjust for this change.

To determine

Prepare journal entry to adjust for the change in tax rate.

Explanation

Change in tax rate: Change in tax rate is a usual practice in corporate world. When the change in tax rate takes place, the company has to adjust its deferred tax amount in order to achieve its desire ending balance.

Prepare journal entry to adjust for the change in tax rate:

DateAccounts title and explanationPost Ref.Debit ($)Credit ($)
December 31, 2018Income Tax Expense 100 
     Deferred Tax Liability  100
 (To record income tax expense with deferred tax liability to adjust the changes in tax rate)   

Table (1)

To record income tax expense with deferred tax liability:

  • Income Tax Expense is a component of stockholders’ equity and dis decreased. So, debit it for $100.
  • Deferred Tax Liability is a liability and increases, so credit it for $100.

Working note 1: Compute the deferred tax liability:

Given, the tax rate is 20% and the deferred tax liability is $1,000 for Year 1, and the tax rate has increased to 30%...

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