Question
Shwonson Industries reported a deferred tax asset of $5 million for the year ended December 31,...
Shwonson Industries reported a deferred tax asset of $5 million
for the year ended December 31, 2020, related to a temporary
difference of $20 million. The tax rate was 25%. The temporary
difference is expected to reverse in 2022, at which time the
deferred tax asset will reduce taxable income. There are no other
temporary differences in 2020–2022. Assume a new tax law is enacted
in 2021 that causes the tax rate to charge from 25% to 15%
beginning in 2022. (The rate remains 25% for 2021 taxes.) Taxable
income in 2021 is $30 million.
Required:
a. Determine the effect of the tax rate change and prepare the
appropriate journal entry to record Shwonson’s income tax expense
in 2021.
b. What effect, if any, will enacting the change in the 2022 tax rate have on Shwonson’s 2021 net income?
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