Question

Bronson Industries reported a deferred tax liability of $9.0 million for the year ended December 31, 2020, related to a temporary difference of $36 million. The tax rate was 25%. The temporary difference is expected to reverse in 2022, at which time the deferred tax liability will become payable. There are no other temporary differences in 2020–2022. Assume a new tax law is enacted in 2021 that causes the tax rate to change from 25% to 20% beginning in 2022. (The rate remains 25% for 2021 taxes.) Taxable income in 2021 is $92 million.

Required:
1. Determine the effect of the change and prepare the appropriate journal entry to record Bronson’s income tax expense in 2021.
2. Is Bronson required to revise prior years’ financial statements as a result of the change?
3. Is Bronson required to provide a disclosure note to report the change?

journal entry

Determine the effect of the change and prepare the appropriate journal entry to record Bronson’s income tax expense in 2021

Answer 1

facts given in the current scenario -

_ Deferred tax liability balance as on 31/12/2020 is $9m, result of

_$30m * 25%(tax rate prevailing as on 31/12/20) = $9m

And subsequently there was change in tax rate and as per recognized accounting standards, the carying amounts of deferred tax assets and liabilities may change even though there is no change in the amont of the related temporary differences, as result of change in effective tax rate.

But it was provided in the question that "a new tax law is enacted in 2021 that causes the tax rate to change from 25% to 20% beginning in 2022. (The rate remains 25% for 2021 taxes.)"

1. Based on above mentioned facts, there will be no effect in the tax amount, hence no journal entry to this effect is required to be passed in the books of accounts.

Calculation of Income tax expenses in books of Bronson Ltd. & Journal Entry

	(in million)
Taxable Income	$         92.00
effective tax rate	25%
Gross Tax Liability	$         23.00
			(in million)
Journal Entry		Dr.	Cr.
Income Tax payable a/c	$    23.00
To Income Tax Expenses a/c		$         23.00

2. In 2022, where there amended tax rate has become effective 20%, deferred tax liability shall be given effect -  

			(in million)
Journal Entry		Dr.	Cr.
DTL a/c		$       1.80
To Profit & Loss a/a		$            1.80

3, A note should be disclosed in the Board of director's report as it is a material amount.

working-

DTL opening balance - $36m * 25% = $9.0m

DTL amended tax rate - $36m * 20% = $7.2m

reduction in DTL = $1.8m