On January 1, 2018, Sun Company's balance sheet reported a deferred tax liability of $185,000 and a deferred tax asset of $99,900. The future taxable amounts that existed as of January 1, 2018, will reverse equally over the next four years beginning in 2018, while the future deductible amounts that existed as of January 1, 2018, will reverse equally over the next three years beginning in 2018. The enacted income tax rate for all tax years as of January 1, 2018, was 37%. On February 1, 2018 the tax laws were amended resulting in income tax rates of 38% for 2018 and 2019; the income tax rate will be 40% for tax years 2020 and later.Requirement:Prepare the journal entry on February 1, 2018 to record the impact of the amended income tax rates.

What will be an ideal response?

      
February 1, 2018Income tax expense5,500   
 Deferred tax asset4,500 (1)   
 Deferred tax liability  10,000 (2) 
(1) The $99,900 deferred tax asset balance was calculated by multiplying the income tax rate by the dollar amount of the future deductible amounts (X); therefore, 0.37X = $99,900, and X equals $270,000. The $270,000 future deductible amount will reverse equally ($90,000) over the next three years, including 2015, creating a deferred tax asset of $104,400 [($90,000 × 0.38) + ($90,000 × 0.38) + ($90,000 × 0.40)] given the new income tax rates. The debit to the deferred tax asset account is necessary to increase it from $99,900 to $104,400.

(2) The $185,000 deferred tax liability balance was calculated by multiplying the income tax rate by the dollar amount of the future taxable amounts (X); therefore, 0.37X = $185,000, and X equals $500,000. The $500,000 future taxable amount will reverse equally ($125,000) over the next four years, including 2018, creating a deferred tax liability of $195,000 [($125,000 × 0.38) + ($125,000 × 0.38) + ($125,000 × 0.40) + ($125,000 × 0.40)] given the new income tax rates. The credit to the deferred tax liability account is necessary to increase it from $185,000 to $195,000.

Business

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