Question

Trio Company has a deferred tax liability at the end of 2019 of $120 as a result of a temporary future taxable amount of $400. If, in May 2020, Congress increases the income tax rate from 30% to 35%, then Trio will record the change as a___________

Answer 1

Trio Company will record an increase in the deferred tax liability due to the increase in the income tax rate from 30% to 35%, thus adjusting the liability from $120 to $140, which means recording a $20 increase.

Step-by-step explanation:

When Congress increases the income tax rate from 30% to 35%, Trio Company will need to adjust its deferred tax liability to reflect the new rate. The deferred tax liability represents taxes that the company expects to pay in the future on temporary taxable amounts. As the income tax rate increases, the amount of taxes that the company needs to pay on the $400 in future taxable income also increases, from the previously calculated $120 to a higher amount.

Deferred tax liabilities are calculated based on current tax rates and the expected amount of future taxable income. With the new 35% rate, the deferred tax liability for Trio Company on the $400 future taxable amount would be $400 x 35% = $140. Therefore, Trio Company will record an increase in the deferred tax liability of $20 ($140 - $120 previously recognized liability) to adjust to the higher rate

Answer 2

Trio Company would adjust its deferred tax liability from $120 to $140 due to the increase in the income tax rate from 30% to 35%, resulting in a $20 increase in liability.

Step-by-step explanation:

If Congress increases the income tax rate from 30% to 35%, Trio Company will need to adjust its deferred tax liability. Initially, Trio's deferred tax liability was based on the future taxable amount of $400 at a tax rate of 30%, resulting in a deferred tax liability of $120. With the new tax rate of 35%, the deferred tax liability on the same future taxable amount of $400 would be $140 ($400 x 35%).

Therefore, Trio will record an increase in the deferred tax liability by $20 ($140 - $120).

These changes reflect the principle that deferred tax liabilities should be measured based on the tax rates expected to apply in the periods when the liabilities are settled, which is consistent with generally accepted accounting principles (GAAP).