Ayayai Co. has one temporary difference at the beginning of 2017 of $469,000. Th

Question

Ayayai Co. has one temporary difference at the beginning of 2017 of $469,000. The deferred tax liability established for this amount is $140,700, based on a tax rate of 30%. The temporary difference will provide the following taxable amounts: $80,000 in 2018, $195,000 in 2019, and $194,000 in 2020. If a new tax rate for 2020 of 20% is enacted into law at the end of 2017, what is the journal entry necessary in 2017 (if any) to adjust deferred taxes? (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Account Titles and Explanation

Debit

Credit

Explanation / Answer

If the tax rate is amended to 20% than accordingly the deffered tax liability should be amended . In the above case there is a temporary difference of $469000. due to which a defferred tax liability of $140700 arises in 2017. But the amendment is for the year 2020 which will not affect the amount for the year 2017 . So the deferred tax liability amounts for the year 2018 ($80000) and 2019 ($195000) would remain unchanged. where as for the year 2020 the deferred tax liabilty would be on the basis of 20% and not 30% tax rate of the temporary difference which is $129333 (194000*0.2/0.3) . No amendment towards the deferred tax liability is necessary for the year 2017 since the rate is amended for the year 2020 so the deferred tax liability should be computed at the rate of 30%.

NO ENTRY ( The reversal of deffered tax liabilty would be the following)

Deffered tax liability A/C - Dr $0

To Profit and loss A/C - Cr - $0  

(being the deferred tax charged reversed)

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