Question

When enacted tax rates change and a company has existing deferred tax liabilities or assets based on the previous tax rates, one accounting effect that results from the change in tax rates

Question 1 options:

	nothing; rate changes should be ignored.
	is a gain or loss on tax rate change.
	is a credit to income taxes payable.
	is a debit or credit to income tax expense.

Ajax Corporation had taxable income of $12,000 during 2020. Ajax used MACRS for tax purposes ($3,400) and straight-line depreciation for accounting purposes ($2,000). Assuming this is the only temporary difference, what would the company's pretax accounting income be for 2020?

Question 2 options:

	$10,600
	$17,400
	$13,400
	$6,600

Answer 1

Solution

1) The correct answer is d)   is a debit or credit to income tax expense

When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be reported as an adjustment to income tax expense in the period of change.

2) The correct answer is a) $10,600

Taxable income $12,000

Add Depreciation for accounting purpose $2000

Less MACRS depreciation $ (3400)

Pretax income for 2020 $ 10,600

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