Question

Beck-Curry Associates reported the following income information for the 2019-2021 period:

Year	Reported Income (Loss)
2019	($1,200,000)
2020	$500,000
2021	$580,000

The company does not have any book-tax differences and is subject to a 21% income tax rate. Beck-Curry is filing a US Corporate Income Tax Return.

Required:

a. Prepare the journal entry to record the 2019 income tax provision.

b. Prepare the journal entry to record the 2020 income tax provision.

c. Prepare the journal entry to record the 2021 income tax provision.

d. Determine the balance of the deferred tax asset at the end of 2021.

e. Assume that a newly enacted tax law increases the income tax rate to 25% on January 2, 2022. Prepare the journal entry to record the effects of the tax rate change.

Answer 1

All amount below are in doller ($)

a) Year 2019 -

Deffered Tax Assets ac dr.............1200000*21% = 252000

To Profit and Loss Account..............252000

b) Now time differance are reversing -

Profit and Loss account Dr. .....................500000*21%=105000

To Deffered Tax Assets account Cr.............105000

c) Now unabosorbed loss of 1200000-500000 = 700000

Profit and Loss account Dr. .....................580000*21%=121800

To Deffered Tax Assets account Cr.............121800

d) balance of deferred tax asset at end of 2021 - 252000-121800-105000 = 25200

e) if tax rate increase and you have DTA - it will benefit the company as company is able to save more in future due to unabsorbed loss in the past. Also at the time of change in tax rate, DTA need to be revalued.

So DTA in the book is at the end of 2021 - 25200

Revised DTA = 25200*25%/21% = 30000

So Now entry would be -

Deffered Tax Assets ac dr.............30000-25200 = 4800

To Profit and Loss Account..............4800