Question

Bronson Industries reported a deferred tax liability of $24.0 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 $110 million.

Required:
1. & 2. Determine the type of accounting change and prepare the appropriate journal entry to record Bronson's income tax expense in 2018 and adjustment, if any, is needed to revise retained earnings as a result of the change.

Answer 1

calcualtion of income tax payable

income tax payable = taxable income * tax rate = $110 million * 40% = $44 million

deferred tax liablity = temporary diffrence * change in tax rate = $60 million * (30% - 40%) = 60*(-10%) = -$6 million

income tax expense = income tax payable + deferred tax liablity = $44 + ( - $6) = $ 38 million

journal entry for the above effect -

income tax expense A/C debit $38

deferred tax liabilty A/C debit $6

to income tax payable A/C $44

Changes in retained earnings -

Because this is a change in estimate, the prior financial statements are not restated. There is no adjustment to retained earnings